What happened
Wall Street is growing increasingly worried we are headed toward a recession, and stocks are being sold off as a result. Industries that are viewed as discretionary -- and so therefore easy to live without if consumers and businesses need to cut costs -- are getting hit harder than most.
Airlines fall on that list, and their stocks are deeply in the red on Monday. Shares of American Airlines Group (AAL -2.18%) and United Airlines Holdings (UAL -2.52%) are each down more than 9% as of midday trading, while shares of Delta Air Lines (DAL -2.62%), Southwest Airlines (LUV -0.54%), JetBlue Airways (JBLU -3.12%), and Spirit Airlines (SAVE -2.90%) all traded down more than 5% apiece.
Brazil's Azul (AZUL -3.62%) also got caught up in the sell-off, down more than 10%.
So what
The best-case scenario that had airline stocks flying high coming into the year has been grounded indefinitely. After two years of losses due to the pandemic, airline investors were excited that pent-up demand for travel would refill carrier cash reserves, allowing the stocks to continue to gain altitude.
The demand has arrived on schedule, but a combination of labor shortages and higher fuel costs have limited airline expansion opportunities and squeezed margins. Planes are full but airlines are largely treading water.
The prospects of either further inflation or the Federal Reserve causing a recession while attempting to tame it creates a whole new level of uncertainty for the sector. Investors were already nervous about what will become of demand in September, when vacation season is largely over. The macroeconomic outlook is a new factor that could limit business travel in the second half of the year, crimping demand ahead of the holiday season.
While Azul is exposed primarily to South America, the stock trades in New York and tends to get caught up in U.S. airline moves. Azul and all of the airlines also face the threat of a new COVID-19 wave, which could lead to fresh restrictions on international travel.
Now what
I'm a big believer in the long-term future of air travel. A growing global middle class and an ever-shrinking world should provide ample demand for airlines in years to come, with the global trade group International Air Transport Association forecasting 2% to 3% annual growth over the next 20 years.
That said, there isn't much reason for investors to buy into these stocks today. The scars of the pandemic will take years to heal even without any added wounds caused by a potential recession. The industry's pilot shortage will lead to contracts with higher wages for years to come. Given the uncertainty about what lies up ahead -- and the extended time frame of a turnaround -- investors have little reason to get excited.
Of these stocks, Delta and Southwest appear the best positioned to complete a recovery ahead of the pack, and Azul is one of the top operators in Latin America. Investors able to buckle up and fly through turbulence will likely do well eventually, but they should plan on a long journey to get there. For most, there is no reason to board at this time.
