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Why American Airlines Tumbled Almost 10% Today

By Todd Campbell - Dec 7, 2018 at 6:01PM

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The major airline operator stumbled after analysts raised questions about the industry's future.

What happened

After analysts at Wolfe Research called into question the bullish argument for airlines, shares in American Airlines Group (AAL -2.92%) fell 9.1% today.

So what

A strong economy that supports ticket sales and falling crude oil prices that help operating expenses have sparked optimism for airlines, but Wolfe Research appears unconvinced that industry players have learned from past mistakes, and thus won't ramp up capacity and eventually enter a profit-busting price war.

A man with his palm on his forehead in front of a chart showing a declining share price.

IMAGE SOURCE: GETTY IMAGES.

In a note today, the research firm reminded investors that historically, the industry has taken cost savings associated with lower jet fuel prices and used them to boost capacity, which can ding pricing power. The risk of that happening again prompted them to cut their rating on the airline industry from "market overweight" to "market underweight."

American Airlines didn't escape the downgrade unscathed. Although Wolfe Research kept favorable ratings for Delta Air Lines (DAL -1.53%), a Warren Buffett favorite, it cut its estimates for American Airlines to "peer perform" from "market perform."

Now what

The potential for a slowing economy to take a toll on a highly cyclical industry like airlines shouldn't be ignored, but there's little evidence yet that top airline stocks are faltering. If capacity does increase and revenue passenger miles begin to sag, then investors will want to find other stocks to park their money in. Until then, it's probably reasonable to recognize that volatility is likely to increase for the industry from here as investors try to determine whether this time in the economic cycle will be different from times past. 

 

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Stocks Mentioned

American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
AAL
$16.26 (-2.92%) $0.49
Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
DAL
$38.64 (-1.53%) $0.60

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