Investor fears about the state of the economy continued to weigh on Wall Street on Friday, pushing the Dow Jones Industrial Average to a 2022 low. Airline stocks continue to underperform the overall market, with shares of United Airlines Holdings (UAL 2.13%), American Airlines Group (AAL 4.75%), Delta Air Lines (DAL 3.03%), JetBlue Airways (JBLU 4.75%), and Frontier Group Holdings (ULCC 6.39%) all down as much as 5%, and stocks including Southwest Airlines (LUV 4.38%) and Alaska Air Group (ALK 5.08%) down more than 3% apiece.
The Federal Reserve pushed rates higher again this week, and it appears Chairman Jerome Powell's message to markets about the group's commitment to getting inflation under control is being received. Stocks have been under pressure due to fears that the Fed's fight will push the U.S. economy into a recession.
For airline stocks, the threat of a recession is just the latest in a steady stream of challenges facing the industry. The pandemic brought global travel to halt, depressing airline revenues and forcing the companies to scramble to cut costs and raise capital. The industry saw demand recover in 2022, boosting revenue, but higher labor and fuel costs, coupled with a shortage of qualified flight crews, has limited the impact of those higher-revenue numbers on the bottom line.
Historically, airlines have not fared well in a recession. If households and businesses are pinched, they are going to prioritize necessary spending, and forgo more discretionary purchases. In most instances airfare is a discretionary item, and an expensive one at that. Should the economy get worse from here, it stands to reason that airlines will see a negative impact on demand.
JetBlue has particular challenges right now. The airline is attempting to acquire rival Spirit Airlines (SAVE 0.95%), an acquisition that was billed as a platform for growth and which would make much less sense if we are entering a prolonged downturn. JetBlue is also dealing with employee unionization efforts, with the International Association of Machinists and Aerospace Workers announcing plans to file an application for a union vote covering the airline's 3,000 ground workers.
How bad is it for airline stocks right now? The U.S. Global Jets ETF, a popular exchange-traded fund tracking the airline industry, has lost nearly 15% of its value in the last two weeks. A number of these airline stocks are today trading below where they traded in late March 2020, when investors were worried COVID-19 would lead to a wave of bankruptcies.
The operating environment clearly isn't as bad now as it was in 2020, but the airlines also have taken on a lot more debt in the last few years thanks to the pandemic. At best, the current economic headwinds appear likely to further delay the industry's post-pandemic recovery. At worst, the airlines could soon be scrambling once again to cut costs and raise cash to weather a downturn.
For risk-tolerant investors, there are likely opportunities at these levels. Delta and Southwest are top operators that are good bets to navigate the current difficulties and emerge from the storm ahead of the industry. But even the most bullish outlook for these stocks requires a multi-year view, and as we have seen over the past few years, there is a lot that can go wrong.
Even if there is value to be found in the airline sector right now, there's no real reason for investors to rush in and buy up potential bargains.