Airline Stocks May Not Be ‘Masters of the Air’ For Long

Subscribers to Chart of the Week received this commentary on Sunday, March 28.

Nothing bonds people more than complaining about air travel. It’s an industry almost universally derided and has finally been forced to face some harsh truths about cutting corners in the name of profit seeking. Beyond the normal, day-to-day grief airlines catch for absurd fees, uncooperative logistics, and the overall vice grip they have on the American consumer, the recent well-documented Boeing (BA) saga has exacerbated frustrations to a boiling point.

It’s so bad to the point that CEO Dave Calhoun announced he’d be stepping down at year-end. Around the same time, the Federal Aviation Association (FAA) announced it was boosting oversight into United Airlines (UAL) after numerous safety incidents crew national media attention. Despite the headlines, BA, American Airlines (AAL), and UAL all gained 2% or more this week.

Per the chart below, UAL, Delta Air Lines (DAL), and AAL have all staged a nifty V-shaped rally this year and boast solid year-over-year gains. These gains could stop in their tracks, though, thanks in part to the cascading effect Boeing’s numerous issues have on airliners, as well as some April seasonality headwinds.

Calhoun’s departure at Boeing is just the tip of the iceberg, and this iceberg could split off and hit the heavyweight airline stocks. Other senior executives announced this week they are jumping ship, including Stan Deal, president of the company’s commercial airplane unit, while board chair Larry Kellner won’t stand for reelection.

Delta, American, and United are all reliant on Boeing’s aircrafts to stock their fleets. Due to the delays in getting Boeing’s 737 MAX back on track, a logjam is forming for new orders. New, much-needed safety inspections also slow down the process. The same way a delayed flight screws up the entire air traffic ecosystem for a day, logjams in supply cause a bottleneck in the face of surging travel demand. In other words, it could be a rough few quarters for airliners’ balance sheets.

 

 

All three airliners report earnings in April, and all three stocks have the majority of the brokerage community maintaining “strong buy” ratings. This is a combination of historical seasonality and earnings reports that reflect Boeing’s wide array of order issues.

April will be an interesting month for UAL and AAL in particular. Both names appeared on the list curated by Schaeffer’s Senior Quantitative Analyst Rocky White of the 25 worst-performing stocks on the S&P 500 Index (SPX) in April for the last decade. Sector peer Delta Air Lines (DAL) also landed on the list.

Per the table below, UAL and AAL average a respective 3.9% and 5.2% loss in April in the last 10 years, with respective win rates of 20% and 30%. DAL isn’t much better, with a muted -0.7% average loss for the month. Not a great signal to be flashing when travel demand rises with the temperatures.

Some companies are trying to get out ahead of the mess and decouple themselves from Boeing. American ordered 175 of its 260 new aircraft from Embraer SA (ERJ) and Airbus. BA’s demise has been ERJ’s gain, with the latter up 44.6% and hitting a nearly six-year high of $27.24 on Thursday. Monitor potential orders going forward; if Embraer becomes the new favorite child, the rising tide could lift all boats.

As usual, options traders are ahead of the curve. Airline exchange-traded fund (ETF) U.S. Global Jets ETF (JETS) is up a healthy 10.4% year-to-date, so it’s a surprise to see put options rule the roost. At the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), JETS’ 50-day put/call volume ratio of 2.12 ranks higher than 94% of readings from the past year. UAL, AAL, and DAL account for roughly 30% of the ETF’s holdings. If the airline industry doesn’t get its act together and separate itself from Boeing’s mishaps, there’s growing evidence of turbulence ahead for investors.