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Why These Top Airline Stocks Slumped Today

By Todd Campbell - Dec 4, 2018 at 6:41PM

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Alaska Air, American Airlines, and Delta Air all tumbled today following Delta Air's November traffic update and tough talk in D.C.

What happened

As a broad-market sell-off caused the S&P 500 ( SPY 1.18% ) to tumble 3.3% and the iShares Transportation Average ETF ( IYT 2.45% ) to falter 4.4% on Tuesday, shares in Alaska Air ( ALK 4.22% ) fell 3.9%, while American Airlines ( AAL 7.88% ) fell 7.5% and Delta Air ( DAL 6.00% ) fell 5.3%.

The only one of these airlines to report significant news today was Delta, which updated investors on November airline traffic figures and issued quarterly guidance that appears to have disappointed investors.

So what

In November, Delta's revenue passenger miles (RPM) grew 4.2%, as domestic RPMs increased 4.5% and international RPMs increased 3.6%. Based on that performance, Delta now expects quarterly unit revenue to climb 3.5%, which is only at the low end of of its 3% to 5% growth forecast, and it sees top-line sales growth of 7.5%, which is roughly in line with its guidance for about an 8% increase.

A man in a suit looking through binoculars.

IMAGE SOURCE: GETTY IMAGES.

Delta also said declining oil prices this quarter should allow it to deliver earnings per share at the high end of its $1.10-to-$1.30 guidance. The United States Oil Fund ( USO 5.23% ), which tracks West Texas crude prices, has dropped to $11.18 from over $16 in early October. 

In addition to Delta's mixed message, the industry could also be reacting to stern talk from Republican senators regarding Saudi Arabia, the world's largest oil producer, following a briefing from CIA director Gina Haspel on journalist Jamal Kashoggi, who was killed in October inside the Saudi consulate in Istanbul.

Last week, President Trump's administration hosted a meeting with key senators to discuss Kashoggi's death and the importance of maintaining positive relations with Saudi Arabia. Conspicuously absent from this meeting, however, was Haspel. 

Haspel finally briefed Republican lawmakers today. Following that meeting, high-profile GOP Sens. Lindsay Graham and Bob Corker made comments suggesting U.S.-Saudi relations could become strained. Both men said they believe Saudi Crown Prince Mohammed bin Salman is complicit in Kashoggi's death.

If tensions mount, it could cause oil and jet fuel prices to climb. The United States Oil Fund lost less than 1% of its value today, significantly outperforming the S&P 500, and it's now up 4.9% since Nov. 28.

Now what

There's worry that cyclical industries, including airlines, could face tough times if rising interest rates cause a slowdown in the economy, but there's little evidence of weakness yet, even though the Federal Reserve has increased rates three times this year and is signaling that more increases are likely. Increasing jet fuel prices are a more pressing threat to industry profit, because jet fuel accounts for 21% of airline expenses industrywide, according to the International Air Transport Association.

For now, the industry continues to enjoy significant profits because of strong demand and low fuel costs. That's attracted the attention of high-profile investors, including Warren Buffett. But investors will want to watch these companies carefully, because that could all change in the future. 

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
DAL
$38.14 (6.00%) $2.16
SPDR S&P 500 ETF Trust Stock Quote
SPDR S&P 500 ETF Trust
SPY
$458.79 (1.18%) $5.37
Alaska Air Group, Inc. Stock Quote
Alaska Air Group, Inc.
ALK
$50.62 (4.22%) $2.05
United States Oil Fund LP Stock Quote
United States Oil Fund LP
USO
$50.51 (5.23%) $2.51
iShares Trust - iShares Transportation Average ETF Stock Quote
iShares Trust - iShares Transportation Average ETF
IYT
$268.83 (2.45%) $6.44
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
AAL
$17.93 (7.88%) $1.31

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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