Investors received discouraging news on Wednesday as both American Airlines and Spirit Airlines issued lower guidance for the current quarter. These developments have added to the growing bearish sentiment surrounding airline stocks.
American Airlines’ Significant Cut in Guidance
American Airlines’ revision is particularly notable due to several factors. The company cited higher labor costs resulting from a recent pay agreement with its pilots, as well as elevated fuel prices. Consequently, the airline now expects adjusted earnings per share to range between 20 cents and 30 cents, a significant decrease from the previous range of 85 cents to 95 cents.
In their recently approved four-year contract, American Airlines pilots secured a substantial pay increase of 46%. This agreement, as confirmed by the Allied Pilots Association union, will lead to an additional cost of $230 million in retroactive pay. Consequently, the airline anticipates a hit of 23 cents a share to third-quarter earnings, with the remainder attributed to surging fuel expenses. Clearly, this poses a significant challenge for American Airlines.
Spirit Airlines’ Worrisome Guidance Cut
While American Airlines’ guidance cut grabbed attention, Spirit Airlines’ reduction is equally concerning, if not more so, for the entire industry. Further details regarding the reasons behind this adjustment are yet to be disclosed.
Airlines Brace for Impact as Demand Softens and Fuel Prices Rise
The low-cost carrier, Spirit, has issued a warning about the current state of the airline industry. They have observed a significant decrease in bookings for the second half of the current quarter leading up to Thanksgiving. This is indicative of a decrease in demand which has put pressure on airline stocks. A contributing factor to this decline is the rise in fuel prices.
Revenue Forecast Revised Downward
Spirit, along with other carriers, has adjusted their revenue forecast for the third quarter. Initially projected to be between $1.3 billion and $1.32 billion, Spirit now expects revenue to fall between $1.245 billion and $1.255 billion.
Stocks Take a Hit
The news of Spirit’s lowered forecast has had a negative impact on airline stocks. Prior to market opening on Wednesday, Spirit’s shares experienced a 4% decrease. Other major carriers were affected as well, with American falling 3.5%, Delta Air Lines down 2.3%, United Airlines slipping 1.9%, and Southwest Airlines experiencing a 2.2% drop.
Industry-Wide Concerns
This recent setback comes after a challenging period for airline stocks. The initial excitement surrounding a surge in summer travel demand has been overshadowed by growing concerns of a slowdown in the industry and the rise in fuel prices.
The Impact on Airline ETF
The U.S. Global Jets exchange-traded fund (JETS), which tracks the performance of airline stocks, has seen a significant decline. Since its peak in July, the ETF has fallen by 17%. It has experienced negative performance in eight of the past nine trading sessions leading up to Tuesday. In premarket trading on Wednesday, it was down by 1.8%.
As airlines grapple with declining demand and increasing fuel costs, the future of the industry remains uncertain. Investors anxiously await signs of a turnaround and stability in the market.
Turbulence Continues to Plague the Sector
The latest developments suggest that the sector is poised for ongoing turbulence. Uncertainty looms large as we navigate the challenges ahead.