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Winter Storm Stella Grounds Airline Stocks: More Pain Ahead?

Zacks Equity Research

Normal life has been disrupted with the “life threatening” winter storm Stella wreaking havoc and predicted to cause further damage. The storm has already battered the Midwest, causing heavy snowfall and resulted in at least two casualties in Wisconsin. And now, the winter storm is headed toward the East.

In fact, in the New York area alone, significant snowfall accompanied by high velocity wind (up to 55 miles an hour) is expected on Mar 14, due to the storm. Reportedly, blizzard warnings for parts of states like New York and Pennsylvania have been already issued by the National Weather Service.

Airline Stocks Hurt

With the storm crippling normal life, it is of little wonder that airline stocks have been hurt severely as travel plans have gone haywire. Shares of major airlines like United Continental Holdings UAL, American Airlines Group AAL, Delta Air Lines DAL and Southwest Airlines LUV were all adversely impacted, ending the trading session on Mar 13 in the red. Additionally, the NYSE ARCA Airline Index lost almost 1% to close at $107.41.

The severity of the storm can be realized from the fact that the U.S. carriers have cancelled over 5,000 flights in the Monday–Tuesday period. Cancellations on Monday hit operations the hardest at the O'Hare International Airport and Midway International Airport. Eastern cities like Boston are feeling the pinch of cancellations on Tuesday.

For example, according to a Bloomberg report, American Airlines has cancelled all its flights for Mar 14 at LaGuardia and John F. Kennedy International airports.

To compensate for the harassment of passengers, who had planned to travel in the affected period, most carriers including JetBlue Airways JBLU, Spirit Airlines SAVE, American Airlines and Delta are offering rebooking facilities without incurring any additional cost.

Such Calamities Put Airlines on the Back Foot

This is not the first time that the sector participants have been laid low by a winter storm. Such acts of nature throw the schedules of carriers out of gear, causing multiple flight cancellations.

For example, Hurricane Matthew had caused extensive damage in the affected areas in the U.S. last year. As expected, the natural calamity impeded travel with many carriers including Delta, JetBlue and Alaska Air Group, Inc. ALK cancelling flights owing to safety-related concerns or offering refunds.

Moreover, this January, an icy winter storm ravaged the Southeast U.S. cities. It also disrupted the flight schedules of airlines, thereby causing undue harassment. The areas worst affected by the storm were Delta’s largest hub, Atlanta and American Airlines hub at Charlotte, NC. Other U.S. carriers like Southwest Airlines also issued travel waivers pertaining to flights to and from the affected areas.

Hard Times for Airlines

The emergence of Stella could not have come at a worse time for airline stocks. Even before the natural calamity, stocks in the space were in a rough patch due to unit revenue issues.  In fact, the recent struggles of the industry can is evident from the Zacks categorized Transportation- Airline industry’s fall of 3.92% over the past one month, while the S&P500 index has gained 1.1%.

Unit Revenue Issues Rule Large

So far this month, we have seen carriers like Delta, American Airlines and Southwest Airlines trimming their forecasts for the first quarter of 2017. The three airline heavyweights currently carry a Zacks Rank #3 (Hold).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Dallas-based, Southwest Airlines now expects operating revenue per available seat miles (RASM: a key measure of unit revenue) to decline in the band of 2% to 3% (old guidance had called for RASM to be flat to down at 1%). This low-cost carrier attributed its decision to unfavorable weather among other factors.

Delta expects passenger unit revenues to remain flat on a year-over-year basis in the first quarter (previous guidance: in the range of flat to 2% increase). Operating margin is now estimated in the range of 10–11% (old guidance: 11–13%). The rise in fuel costs was one of the factors leading to these downward revisions.

American Airlines now expects total revenue per available seat mile (TRASM) to increase approximately in the band of 1.5% to 3.5% on a year-over-year basis. This compares unfavorably with the previous view of 2.5% to 4.5%.

Escalated Costs Hurting Too

With labor deals in vogue in the airline space, it is natural that labor costs are surging. This surge hurt the bottom lines of carriers in the fourth quarter and is also expected to do the same in the first quarter of 2017 as well.

United Continental expects unit costs in the first quarter to increase in the band of 4.5–5.5% due to higher in labor costs. At American Airlines, consolidated operating costs per available seat miles (CASM), excluding special items, is projected to increase 9% in the first quarter.

Moreover, the rise in fuel costs is also expected to limit earnings growth in the first quarter. Additionally, the revised travel ban announced by President Trump has hurt airline stocks.

Bottom Line

With airline companies already grappling with the above-mentioned issues, the emergence of Stella has only added to the woes of stocks in the space. Consequently, investors are expected to remain glued to the updates, as stocks are striving to return to their winning ways.

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Southwest Airlines Company (LUV): Free Stock Analysis Report
JetBlue Airways Corporation (JBLU): Free Stock Analysis Report
Delta Air Lines, Inc. (DAL): Free Stock Analysis Report
Alaska Air Group, Inc. (ALK): Free Stock Analysis Report
United Continental Holdings, Inc. (UAL): Free Stock Analysis Report
Spirit Airlines, Inc. (SAVE): Free Stock Analysis Report
American Airlines Group, Inc. (AAL): Free Stock Analysis Report
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