- The article covers the airline stocks to sell during the current downturn
- American Airlines (AAL): Gigantic debt load which will take years to reverse
- Allegiant Air (ALGT): Rising fuel costs will weigh down near-term results
- Delta Air Lines (DAL): Debt to equity ratio is concerning while DAL stock trades at a lofty valuation
- SkyWest (SKYW): Pilot staffing constraints will severely limit its flight schedule for the year
- Air Transport Services Group (ATSG): Revenues are highly dependent on three main customers
- Boeing (BA): Labor shortages and operational costs are negatively impacting its supply chain
- JetBlue (JBLU): Acquisition bid for Spirit Airlines will further add to its debt load
Shares of the top airline operators have tumbled amidst recessionary fears. The Federal Reserve continues to tamp down the rampant increase in inflation, thereby crippling the stock market and other risky assets. Moreover, the increase in consumer prices has forced the airline industry to take a step back from its progress over the past several months. Hence, the current predicament has investors looking at which airline stocks to sell.
Investors in airline stocks are justifiably nervous. The sector entered the year on a relatively unstable footing with the pandemic ravaging travel demand. Strong pent-up demand for travel coupled with Covid-19 in the rear-view mirror signaled a comeback. All that excitement, though, has worn off with the troubling macroeconomic conditions.
Don’t get me wrong, plenty of airline stocks boast strong long-term bull cases. However, the effects of the pandemic and the disconcerting business environment at this time are weighing down many of the bigwigs in the sector. Hence, let’s look at seven airline stocks to sell.
|Delta Air Lines
|Air Transport Services Group
American Airlines (AAL)
American Airlines (NASDAQ:AAL) stock has been a popular post-pandemic play. There was a gush of excitement among investors of AAPL stock due to a healthy increase in demand. Nevertheless, its massive debt load and unattractive margin profile make it a bad wager for long-term investors.
American Airlines had a whopping $24.3 billion in debt entering 2020, and by the conclusion of 2021, its debt levels had risen to $38.1 billion. Despite its best efforts to limit capital expenditures, the airliner’s debt load continues to be a major long-term problem.
Additionally, its margin profile remains a concern. AAL expects a second-quarter pre-tax margin of 4% to 6% compared to 7.4% during the second quarter of 2019. Hence, AAL stock remains unappealing for the long haul.
Allegiant Air (ALGT)
Las Vegas-based airliner Allegiant Air (NASDAQ:ALGT) has been a step ahead in capacity levels compared with its peers and is experiencing robust growth in demand numbers of late.
However, the current macro-economic situation has led to an astronomical increase in fuel costs, which is why it now expects to post second-quarter revenues at the lower end of its previous outlook.
Though its margins have improved in the past couple of years, they are still considerably behind its five-year average. Additionally, liabilities have been increasing aggressively, significantly impacting its asset turnover ratio.
Delta Air Lines (DAL)
Delta Air Lines (NYSE:DAL) is among the cream of the crop as far as airline businesses are concerned in the U.S. The past couple of years have been understandably rough for its business, but things were looking upward entering 2022.
However, DAL’s positioning is concerning, with the rising price of jet fuel, increase in employee wages, and international flight troubles.
A lot of it has to do with its dwindling financial flexibility. Its debt load shot up over 100% in 2020 to $35.55 billion, a number that remained relatively stable in 2021. Working capital remains negative, while its debt to equity ratio suggests that bankruptcy isn’t off the table.
It last filed for bankruptcy in 2005, and the conditions are such that it could potentially happen again. All the while, DAL stock trades over 36 times its price/earnings to GAAP ratio.
SkyWest (NASDAQ:SKYW) a leading regional airline in the U.S., posted the best industry results last year. It earned a massive $112 million profit, complemented by a huge push in sales. However, its stock recently plummeted after posting a negative guidance forecast for 2022.
In October last year, the company management stated that it was on track to achieve earnings per share of roughly $3 to $4. As per its recent guidance, SkyWest expects to post only break-even results.
The stark contrast in guidance is linked to pilot staffing constraints, resulting in a 10% to 15% reduction in block hours. Hence, SkyWest is constricted in its ability to increase its flight schedule, and it would probably take a year to correct the imbalance. Hence, its near-term outlook remains bleak.
Air Transport Services Group (ATSG)
Air Transport Services Group (NASDAQ:ATSG) provides air cargo transportation, airline leasing, operations, and other related support services to the air transportation and logistics sector. Recent results have been solid, driven by a robust expansion in sales and EBITDA. Moreover, it is investing heavily in fleet expansion to continue driving growth for the foreseeable future.
Despite the positives, investors need to consider plenty of issues. Over the years, one of the key problems with the business is that its growth is closely tied to capital expenditures. Free cash flows have been moving sluggishly while capital expenditures continue growing steadily.
Furthermore, the top three of its customers account for 75% of its top line. Its top customer is Amazon, which is also one of its largest shareholders. Though ATSG has benefitted from Amazon’s expansion, the dependence on a handful of customers is a major risk.
Boeing (NYSE:BA) has been a spot of bother since the much-talked-about controversy over its flagship 787 aircraft.
Problems continue to persist with its existing models and are incurring substantial expenses that have put immense pressure on its margins. Moreover, the delays in Federal Aviation Agency approvals are weighing down its supply chain. Its CEO David Calhoun recently said that supply chain issues will continue to be a limiting factor in 2023.
Boeing recently reported its first-quarter results, where revenues dropped 8.1% from the prior-year period to $13.99 billion. Also, its sales fell short of analyst estimates by $1.91 billion. Moreover, it reported a negative EPS of $2.75. The high development expenses, labor shortages, and operational costs have significantly weakened the company’s fundamentals, a trend that should continue in the near term.
Airline Stocks to Sell: JetBlue (JBLU)
JetBlue (NASDAQ:JBLU) was one of the few airliners that had remarkably effectively managed its debt load. However, its attempts to acquire Spirit Airlines could undo all its efforts. The cash nature of the deal is perhaps the biggest problem with the business, as it looks to use cheap debt to make the deal attractive.
Its net debt currently stands at $4.76 billion; if the deal is closed out, that figure could potentially jump past the $6.5 billion mark. Moreover, it would be forced to pay upfront accelerated prepayments of $1.50 per share. Additionally, it agreed to pay up $350 million in a potential reverse break-up fee. Hence, JBLU has plenty to lose as part of the merger as it piles on more debt.