Airline stocks are not flying high this year.
Even though most U.S. airlines are posting billions of dollars in profits and are expected to report solid second-quarter earnings this month, Wall Street has been disappointed.
Shares of several carriers, including Delta Air Lines and United Airlines, have dropped by a third in the first six months of the year. Fort Worth-based American Airlines [ticker: AAL] has performed the worst, with its shares down almost 35 percent, trading around $30 a share, well below its November 2015 high of $47.
“By one measure, this is literally the worst it has ever been for some of these [airline] stocks,” Wolfe Research analyst Hunter Keay told investors in a report last week, noting that American has underperformed the S&P 500 by 33 percent just in the last two months.
Dallas-based Southwest Airlines had the smallest decline among major carriers with its share price dropping a little less than 10 percent. Investors have only seen positive stock gains with low-cost carrier Spirit Airlines, which had its stock value increase 11 percent, and Virgin America, which experienced a 56 percent stock price boost after it announced it would be purchased by Alaska Airlines.
Industry analysts point to several factors affecting airline stocks including terrorist attacks at airports in Brussels, Belgium, and Istanbul, Turkey, which could depress travel demand internationally. Long security checkpoint wait times at U.S. airports could affect leisure travel domestically.
But Wall Street investors seem the most concerned about unit revenues, also known as revenue per available seat mile. Investors view the measure as a way of determining how profitable an airline is because it shows how much income an airline generates for each available seat mile that it flies.
American Chief Executive Doug Parker was asked about the revenue declines on the carrier’s first-quarter earnings call, and he acknowledged that the airline’s revenues needed to improve.
“Our job is to maximize shareholder value, and we know there are things that could be done better and particularly … on the revenue environment,” Parker said. “We think there are brighter days ahead, but we’re not pleased with where we are now.”
The carrier has told investors it expects passenger unit revenue to fall 6 to 8 percent for the second quarter.
“It’s the continuation of this unit revenue decline that worries people,” said industry analyst Bob Mann. “And anybody with exposure to the EU or particularly to the U.K. really took the brunt of this.”
Investors sold off shares of American, which has a joint venture with British Airways, and Delta, which partners with Virgin Atlantic, following Britain’s vote to leave the European Union last month.
Cowen and Company analyst Helane Becker said she expects airlines to reduce flights across the Atlantic later this year as they deal with the uncertainty related to the Brexit vote. But with second-quarter earnings reports in July, airline stocks could be headed back in the right direction.
“The U.S. airlines lost $37 billion in equity value this quarter,” Becker wrote in a note to investors last week. “Once again, [third quarter] guidance will be crucial for near-term stock performance. … The fare environment is still competitive but appears to be showing signs of improving.”
Percent Change in first six months
Delta Air Lines