Market Overview

Why Airline Stocks Are Getting Killed

Why Airline Stocks Are Getting Killed
Q4 13F Roundup: How Buffett, Einhorn, Loeb, And Others Adjusted Their Portfolio
The Airline Sector: American, United Have Earned An Upgrade, Bernstein Says
Time to Buy This Fast-Growing Airline? (GuruFocus)
Related LUV
Benzinga's Top Upgrades, Downgrades For January 30, 2018
The Market In 5 Minutes: AMD On Tap, Airline Pair Trade, And Bezos, Buffett, Dimon Disrupt The Health Care Space
Transports Weekly Snapshot - VIX Returns To Correlation With High-Yield Bond Spreads (Seeking Alpha)

Airline stocks have absolutely collapsed on Wednesday.

American Airlines Group Inc (NASDAQ: AAL), Southwest Airlines Co (NYSE: LUV), United Continental Holdings Inc (NYSE: UAL), Delta Air Lines, Inc. (NYSE: DAL) and Spirit Airlines Incorporated (NASDAQ: SAVE) are down more than 5 percent.

The U.S. Global Jets ETF (NYSE: JETS) has fallen by more than 4 percent.

The obvious question is: Why is the sector getting killed?

Goldman's Oil Forecast

It's worth digging into this first.

On Tuesday, Goldman Sachs updated its outlook on crude and shale oil for the next five years. In particular, the firm is projecting $60/bbl WTI crude oil prices in 2018 and $50/bbl prices by 2020.

According to Goldman's Top 420 projects report, the firm now believes U.S. oil supply will grow higher than expected, even in the face of low prices.

"Although we believe the sharp reduction in US drilling activity is likely unsustainable, greater productivity and efficiency gains in shale should support long-term annual crude oil production growth of 500-700kbpd," it added.

Related Link: Introducing JETS, The Market's Only Pure-Play Airline ETF

Of course, it's generally assumed airlines and oil are inversely correlated. A 2014 ABW Insights study, for example, found this relationship is statistically significant.

So...oil down, airlines up, right?

Not quite.

There's another part of the story that could explain the recent decline in airline stock prices.

Southwest Guidance

Around the Street, traders are discussing Wolfe Research's 8th Annual Global Transportation Conference. Chatter suggests weakness in Southwest and its peers could be directly related to comments an executive made at the event on Tuesday.

Southwest, in particular, discussed capacity guidance during a presentation. The company said it sees capacity growth of 7 to 8 percent this year, and growth of 6 to 7 percent in 2016.

On stage, Chief Financial Officer Tammy Romo discussed the data. The changes to guidance were only "tweaks," she said, but added that 2015 numbers were "unique." It's possible growth will hit a top this year, and will shrink over the longer-term.

As Statista reports, Southwest has nearly 17 percent of the domestic airline market place, revealing why these projections could be affecting the rest of the sector.

Posted-In: Analyst Color News Short Ideas Commodities Events Markets Movers Trading Ideas Best of Benzinga


Related Articles (DAL + AAL)

View Comments and Join the Discussion!