Airline stocks were battered for a second session Tuesday, as investors continued to monitor the flooding in Texas caused by Tropical Storm Harvey and await updates on when regional airports and air services can be restored.
The NYSE Arca Airline index
was down 0.8% at $104.47, and is now down almost 16% from its July peak, putting it firmly into correction territory, which many on Wall Street define as a decline of between 10% and 20% from a significant peak.
The sector has been under pressure in recent months from falling ticket prices caused by discounting, as well as a series of disruptions caused by IT outages, public-relations gaffes and rising labor costs. Terror attacks in Europe have discouraged some travelers, adding further pressure.
“While some investors now assume it’s ’over’ for the airlines, the sector experienced a nearly 18% drop in 2014 and a 32% collapse in 2015-2016 before running to new all-time highs,” said Michael Darda, chief economist and market strategist at MKM Partners.
United Continental Holdings Inc.
Spirit Airlines Inc.
and Southwest Airlines Co.
are the most exposed to the disaster in Texas, according to Cowen analysts. Houston airports are expected to remain closed until at least Thursday. The city accounts for about 17% of United’s capacity for the last 12 months, said Cowen analyst Helane Becker, citing data from aviation industry market intelligence company Diio Mi.
The city accounts for about 7.5% of Southwest’s capacity and about 8.5% of Spirit’s capacity, the data shows. The airlines canceled thousands of flights and redirected passengers as much as they could ahead of the storm.
“By our math, United could see at least a +$265 MM impact as a result of the storm, assuming the airports are reopened Thursday,” Becker wrote in a Tuesday note
Southwest and Spirit will be impacted to a lesser degree. “Recovery to normal operations will be important but a timeline has yet to be defined given continued rainfall,” she wrote.
Past hurricanes offer the best models for evaluating the damage from Harvey, said Becker. Hurricane Katrina in 2005 was mostly a New Orleans event, but it took years for the city to recover. Hurricane Ike in 2008 was a Houston event that cost Continental about $50 million, although it was a smaller airline at the time with the city as its most important hub.
Hurricane Sandy, the 2012 storm that ravaged New Jersey and New York, may be the best comparison, as its impact went far beyond airport closings. People didn’t travel as much after Sandy as the cleanup was lengthy and complicated.
Cowen is expecting Southwest to book losses of about $77 million from Harvey, assuming airports in the region remain closed for seven days. That includes the losses from canceled vacations as homeowners choose to use discretionary funds to pay for repairs. The analyst is also expecting school closures, which may lead to further vacation cancellations as schools try to make up for lost classroom time.
For Spirit, she estimates losses of about $11 million.
United shares were down 0.3%, Southwest was down 0.8% and Spirit was down 1%.
The NYSE Arca Airline index has fallen 5.4% in 2017, while the S&P 500
has gained 9%.