4 Airline Stocks To Shy Away From In The Latter Half Of 2018

Oil prices have been on the rise this year, shooting up more than 20% so far. Apart from the geopolitical tensions in the Middle East, the economic crisis in Venezuela — a major oil exporter — and OPEC’s recent plans of a lower-than-expected output raise have backed the rally in oil prices. Since fuel expenses are significant for airlines, an increase in oil prices is unfavorable for the space.

According to the recent commentary by Ed Bastian, CEO of Delta Air Lines, Inc. (DAL - Free Report), the carrier is likely to incur additional costs to the tune of $2 billion in 2018 due to an increase in oil price.

In fact, it is not only Delta but the entire airline space that is likely to suffer due to a rise in fuel costs. In April, another airline heavyweight — American Airlines Group Inc. (AAL - Free Report) — had trimmed its current-year earnings per share projection due to high fuel costs.

Rise in fuel costs is likely to dent Delta’s profitability in the second quarter as well. This Atlanta, GA-based carrier slashed its second-quarter earnings per share guidance earlier this month, due to rising fuel costs. The metric is now likely to be in the range of $1.65-$1.75, much lower than the previous estimate between $1.80 and $2.

Capacity-Related Woes

Apart from high fuel costs, woes related to capacity overexpansion have also been a thorn in the flesh for airline stocks. Highlighting the capacity-related woes, load factor (percentage of seats filled by passengers), which is an important indicator of profitability and efficiency for airline companies declined in May for major U.S. carriers, namely Delta and Southwest Airlines Co. (LUV - Free Report). A fall in load factor indicates inefficient capacity utilization that creates more vacant seats.

Capacity expansion may lead to oversupply in the market even as fuel costs remain well below the highs of mid-2014, despite the recent resurgence. Moreover, airfares have remained low, with the metric declining in April as well as May. Low airfares are favorable for fliers but a drag on the top line of carriers due to their lesser profits.

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