Breakout

Sequestration Flight Delays Not Hitting Airline Stocks…Yet

Jeff Macke
Breakout

Starting Sunday the Federal Aviation Administration (FAA) was forced to cut spending by 10% as a result of forced sequestration cuts. According to Reuters the cuts have already resulted in delays of more than an hour in New York with more delays to come at other hub airports.

This sounds exactly like any other Monday in the last 20 years of air travel. Regardless, FAA authorities swear these delays are different and the direct result of the sequester.

From an investment perspective, the question is whether or not the scorching hot stocks of the major airlines can withstand a service slowdown, even it isn't their fault (this time). Yahoo! Finance senior columnist Mike Santoli says the sector could hit an air pocket if the delays cause business travelers to consider alternatives to flying.

"The story with the airline stocks is pricing power," Santoli says in the attached video. The industry has reduced capacity on travel routes and has seen massive merger activity. That makes for more crowded flights and fewer alternatives for travelers who don't want to share an armrest. Historically these stocks are "not a great buy and hold business," understates Santoli, suggesting a pullback in the sector should be expected.

Entering afternoon trading on Monday, the delays are shorter than expected and the stocks aren't getting hit. United Continental (UAL) is down less than 1% and Delta (DAL) is actually having a nice rally. Both stocks are up about 30% already in 2013, suggesting trimming some profits is in order with or without delays driving away demand.

The mess has to flower beyond what people were expecting for the delays to hit the sector in Santoli's estimates. Expectations for smooth, on-time travel are generally extremely low. Until it's possible to definitively distinguish between a sequestration-based delay and business as usual, it's unlikely FAA cutbacks are going to be a catalyst for the stocks in either direction.

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