What happened
Shares of United Airlines (UAL 4.63%) were sliding today after the airline grounded 25 planes due to missed inspections. The travel stock might also be responding to expectations that the Federal Reserve will raise interest rates by 75 basis points later today as rising interest rates bode poorly for the travel sector.
As of 12:33 p.m. ET on Wednesday, the stock was down 2.8%.
NASDAQ: UAL
Key Data Points
So what
Yesterday afternoon, the Federal Aviation Administration (FAA) said that the airline had canceled flights because it had neglected to do required inspections on the wings of 25 Boeing 777-200 jets.
As of Tuesday, United said it had returned 10 of the planes to service, while it was working to get the others ready.
The issue comes after its Boeing 777-200 jets had been grounded for over a year due to a problem with the planes' external engine covers. The FAA said the wing inspections were unrelated to the earlier engine troubles, and just a routine maintenance matter.
Nonetheless, the cancellations could cast doubt on the airline's ability to rebound and ramp up international flights as demand bounces back with the pandemic fading.
Separately, investors might have been rotating out of airline stocks in anticipation of the Fed rate decision this afternoon, especially since its chairman, Jerome Powell, had said earlier that rising rates could cause "economic pain," which would have an outsize impact on the airline sector.
Now what
The Fed's tightening comes at a vulnerable time for the United as it's finally recovered from the pandemic, posting record TRASM (total revenue per available seat mile) in the second quarter and an adjusted operating margin of 8.2%, marking its first quarter of profitability since the pandemic began.
Travel demand appears to be strong through the remainder of 2022, and fares are up due to labor shortages and rising demand, but investors should keep an eye on interest rates. If inflation remains stubborn, rates will keep moving higher, and that should eventually slow down demand for air travel.
