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Why Airlines Stocks Are Falling Today

By Lou Whiteman – Oct 6, 2021 at 2:17PM

Key Points

  • Goldman Sachs has downgraded JetBlue and American, citing concerns that expenses will rise faster than revenue in the quarters to come.
  • Conditions are tough for the entire industry, causing a wide number of airline stocks to fall.
  • There is long-term opportunity, but investors need to pick stocks carefully.

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Two analyst downgrades point to issues that could impact the entire sector.

What happened

On Wednesday, a pair of airline stocks were downgraded by a leading Wall Street analyst. The whole sector is selling off as a result, with shares of American Airlines Group (AAL -0.52%), JetBlue Airways (JBLU -0.67%), and Spirit Airlines (SAVE 0.30%) leading the way down about 5% each in midday trading.

So what

Airline stocks have experienced some turbulence of late, caught between investors bullish on a post-pandemic economic recovery and those who are worried about whether the pandemic is really over, among other issues. On Wednesday, the bears are in charge after Goldman Sachs downgraded both American and JetBlue.

Plane in flight as seen through window of terminal waiting area.

Image source: Getty Images.

Goldman's Catherine O'Brien downgraded JetBlue to neutral from buy and cut her price target to $17 from $20. In an accompanying note, O'Brien said she remains positive the airlines are on the path to a recovery but is worried fourth-quarter results and the 2022 outlook could be put under pressure due to higher fuel costs and an uncertain revenue environment.

O'Brien also took American to a sell from a neutral and cut that airline's price target to $18 from $19. American, she notes, has "relatively higher" operating leverage than its rivals, and that will eat into profitability as conditions slowly normalize.

In short, the analyst is predicting that over the near-to-medium term, cost pressures are likely to outrun pricing power, putting pressure on results. That is likely to continue until corporate travel returns, which is not expected to happen in earnest until 2022 at the earliest.

Those concerns can easily be translated to the entire airline sector, and Spirit, which is viewed as a likely beneficiary of a quick recovery, is being hit particularly hard. Delta Air Lines (DAL 0.80%) was off about 2.5% after it too was the target of a downgrade, with Wolfe Research lowering the shares to peer perform from outperform on valuation.

Now what

Overall, Goldman's O'Brien remains upbeat that the airlines are recovering. The issue is the timing. Her logic is hard to argue with.

For those with a long-term mindset and who are willing to hold through whatever headwinds might lie up ahead, there is nothing in this research that should be cause for panic. The U.S. aviation sector has shown surprising resiliency through the pandemic crisis and is well positioned to hold on now through whatever COVID variants or other unexpected twists might lie ahead.

Given the risks, I believe it is best to focus on best-of-breed operators with superior balance sheets like Delta and Southwest Airlines (LUV 1.39%). Airlines might take investors on a wild ride in the months to come, but the long-term future for the sector looks a lot better now than it did in the early days of the pandemic. 

Lou Whiteman owns shares of Delta Air Lines and Spirit Airlines. The Motley Fool owns shares of and recommends Spirit Airlines. The Motley Fool recommends Delta Air Lines, JetBlue Airways, and Southwest Airlines. The Motley Fool has a disclosure policy.

Stocks Mentioned

JetBlue Airways Stock Quote
JetBlue Airways
JBLU
$7.42 (-0.67%) $0.05
Southwest Airlines Stock Quote
Southwest Airlines
LUV
$38.01 (1.39%) $0.52
Delta Air Lines Stock Quote
Delta Air Lines
DAL
$33.80 (0.80%) $0.27
Spirit Airlines Stock Quote
Spirit Airlines
SAVE
$20.24 (0.30%) $0.06
American Airlines Group Stock Quote
American Airlines Group
AAL
$13.53 (-0.52%) $0.07

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

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