Oil prices have been soaring in recent weeks, and crude futures (CLV23) just reached their highest point since last November on the back of ongoing supply cuts. Rising oil prices are already having a significant impact on the airline industry, which is one of the largest consumers of fuel. Jet fuel accounts for a significant portion of operating expenses at most airlines, and carriers without effective fuel cost hedging - or those operating on a low-cost model - are particularly sensitive to oil price variations.
For example, in a regulatory filing, American Airlines (AAL) once warned, “we estimate that a one cent per gallon increase in the price of aircraft fuel would increase our 2021 annual fuel expense by $38 million" [emphasis added].
So, even as airlines coast off the fumes of robust travel demand during the summer months, it's not all smooth sailing for the group. In fact, two of these names just issued profit warnings today in response to the challenging environment, sending stocks lower across the airline industry.
Against a backdrop of rising fuel expenses, here are three stocks to skip as oil prices keep climbing.
AAL: Antitrust Troubles… and Zero Hedging
American Airlines (AAL), a global aviation giant, finds itself in a turbulent spot. Earlier this summer, antitrust regulators forced the breakup of American's partnership with JetBlue Airways (JBLU) - and now energy costs are on the upswing, with North American fuel prices up more than 4% in the past month.
Notably, American Airlines does not hedge its fuel expenses - a strategy that has helped other carriers to cushion the blow of unusually high oil prices in the recent past.
American Airlines cut its earnings forecast drastically today, with the new 3Q guidance set between 20 and 30 cents from share - down considerably from 85 to 95 cents previously. Along with higher fuel costs, the airline cited costs associated with its ALPA collective bargaining agreement.
As for stock performance, American Airlines is a clear laggard. Year-to-date, it's trailed both the market and the industry, managing only a 4.3% gain. That compares to a return of 16.2% for the S&P 500 Index ($SPX) and 4.7% for the U.S. Global Jets ETF (JETS).
Analysts are appropriately cautious, with a consensus hold rating on the stock. Only 3 out of 15 analysts recommend a strong buy - although the mean price target is $18.25, implying 37% potential upside.
On the earnings front, analysts are expecting a 58.1% year-over-year decline in Q4 2023 and a 2.6% decline in FY 2024. These forecasts reflect the challenges the airline faces, including rising fuel costs, reduced demand, and heightened competition.
Considering these factors, investors may find it prudent to steer clear of American Airlines stock as oil prices soar. The road ahead seems to promise more challenges than rewards.
SAVE: Waiting on a White Knight in JetBlue
Spirit Airlines (SAVE) operates as a low-cost carrier primarily in the U.S., Latin America, and the Caribbean. Their budget-friendly approach relies on packing flights, keeping operational costs down, and charging for extras. However, 2023 hasn't been smooth sailing for SAVE. They've grappled with rising oil prices, newly emerging Covid-19 variants, workforce shortages, and regulatory threats to a proposed buyout bid from JetBlue - all of which have cast shadows over the stock.
Year-to-date, SAVE's price has slipped by more than 12%, considerably underperforming the broader market and its peers in the airline industry.
The mean target price of $19.93 suggests 22% potential upside from current levels. However, only one of the eight analysts tracking the stock recommends buying it, with a consensus rating of hold.
Like American, Spirit Airlines slashed its outlook earlier today. Between higher fuel prices and steeply discounted travel bookings, SAVE now sees Q3 revenue between $1.245 billion and $1.255 billion, compared to its prior guidance of $1.3 billion to $1.32 billion.
Already, analysts were projecting a staggering 2,600% year-over-year earnings drop in Q3 2023, and a 141.67% decline in Q4 2023.
SAVE’s earnings results have been consistently disappointing, as it has missed estimates in three of the last four quarters, with a 4% operating margin compared to the industry average of 6%.
Given these factors, it's advisable for investors to avoid SAVE as oil prices rise, since the carrier faces more challenges than opportunities ahead.
JBLU: Crumbling Under the Regulatory Pressure
JetBlue Airways (JBLU) is a low-cost carrier known for affordable fares, with revenue augmented by charging for extras, like baggage and seat selection. Their business model hinges on filling seats, keeping costs low, and additional fees to generate profits.
However, they've encountered some major strategic challenges. First, their Northeast Alliance partnership with American Airlines was busted up over antitrust concerns - and now those same concerns over competition could sink its pending merger with Spirit Airlines. The potentially lengthy legal battle could be a distraction for JetBlue for quite some time.
JBLU has declined by 24.5% year-to-date, completely sitting out the broader market's 2023 rally.
The mean target price from analysts is $7.28, suggesting potential upside of 48%, but analysts are divided. One calls the stock a strong buy, one names it a strong sell, and the remaining 7 deem it a hold.
JetBlue cut its 2023 outlook last month following its forced breakup with AAL, but has yet to update its guidance in response to rising fuel costs.
Analysts, on average, expect earnings to crater more than 100% in the current quarter from the year-ago period, with the consensus calling for a loss of $0.11 per share - compared to EPS of $0.21 last year.
Conclusion
All three of these airline stocks face formidable challenges amidst surging oil prices, as demonstrated by today's latest guidance cuts. Therefore, our recommendation to investors is to steer clear of these stocks while energy costs are elevated - especially while the JBLU/SAVE merger remains at serious regulatory risk.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
