The stock market has managed to show some signs of early strength in 2023, fighting back against downward pressure. Major market benchmarks are all up on the year so far, and stock index futures suggested that Wednesday morning might bring modest gains to add to the upward momentum.
One of the leading areas of the stock market in the opening couple of weeks of the new year has been the airline industry. Even as December storms forced holiday travelers to deal with significant disruptions to their travel plans, investors have increasingly believed that the worst times for airlines are now behind them. On Wednesday morning, however, news of yet another problem hit the travel industry hard, raising speculation about a potential point of weakness for the transportation system and causing investors to ask questions about what the impact on airline stocks might be.
Grounded
Air travelers woke up to bad news on Wednesday morning, as the Federal Aviation Administration suffered an outage in a key safety system. The FAA's Notice to Air Missions (NOTAM) system failed, causing problems with operations throughout U.S. airspace and leading the agency to order a temporary halt to all domestic flight departures.
NOTAMs provide essential updates to pilots on a wide variety of issues, including information about runway and taxiway closures, field conditions during weather events, and availability of navigational aids.
The FAA said it is working to restore the NOTAM system as quickly as possible, going through validation checks to ensure the integrity of the system and its database. As of 9 a.m. ET, the FAA had lifted its ground stop, and normal air traffic operations began to resume. Nevertheless, travelers can expect continued delays as the impact of the halt ripples across daily flight schedules.
Just another obstacle to overcome
For the most part, airline stocks didn't immediately react negatively to the news. Delta Air Lines (DAL 2.86%) shares were down about half a percent in premarket trading, and both American Airlines Group (AAL 6.60%) and United Airlines Holdings (UAL 17.45%) saw similar moves lower. Southwest Airlines (LUV 2.60%) took a slightly larger hit, but the 1.5% drop still wasn't a major problem.
The news comes at an unfortunate time, particularly for Southwest, which took a long time to recover from holiday storms in December. The airline's computer system played a role in the difficulties that Southwest faced in getting planes, crews, and passengers in the right place at the right time following the storms. Southwest passengers might therefore be particularly sensitive in seeing the failure in the FAA's computer system as a reminder of how technological problems increasingly affect the quality of air travel.
For its part, Delta is scheduled to release its latest quarterly financial results on Friday. Investors expect Delta to close 2022 with a profit of more than $3 per share, as the airline revs back up toward pre-pandemic levels of revenue and passenger volume. Moreover, shareholders have high hopes for Delta's continued ascent in 2023, expecting $5 per share in earnings. Indeed, the relatively low valuations for airline stocks have been part of the reason why value-seeking investors have identified them as candidates for strong returns in the coming year.
Keep your eyes on the skies
The state of the airline industry has been in flux for years, but investors are optimistic enough not to let the latest FAA fiasco get in the way of their long-term hopes for stocks in the sector. If the problems in the NOTAM system turn out to have been due to a cyberattack, then it could raise new questions about data security in the transportation system. For airlines, however, the news isn't likely to have a lasting impact on their prospects in the long run.
