Why Airlines Are Getting Killed

Airline stocks have absolutely collapsed on Wednesday.

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

U.S. Global Jets ETF JETS is down 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."

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

It's generally assumed airlines and oil are inversely correlated. A 2014 ABW Insights study, for example, found the sector is inversely correlated with the commodity. The data is statistically significant.

So...oil down, airlines up, right? Not quite.

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