Airline stocks are currently experiencing a tumultuous period, and the looming threat of a government shutdown is posing additional challenges for the industry.
During a shutdown, essential personnel such as air-traffic controllers and Transportation Security Administration officials would be required to work without pay. The White House has warned that this situation could result in delays and longer wait times for travelers at airports.
However, if we examine historical trends, we find that a government shutdown may not be entirely detrimental to airline stocks. In fact, during the previous federal government shutdown, which lasted an unprecedented 35 days from December 22, 2018, to January 25, 2019, shares of major U.S. airlines saw an average increase of 9.4%. Southwest Airlines (ticker: LUV) emerged as the best performer, with a remarkable climb of 19.6%, as reported by Dow Jones Market Data. Remarkably, only one carrier, Delta Air Lines (DAL), experienced a decline of 3.5%.
It is important to note that the stock rally during the shutdown was not directly influenced by this event. Nonetheless, the impact on the airline sector was not as severe as anticipated, despite longer security lines and occasional significant delays.
An illustrative example is Southwest Airlines, which estimated a revenue loss of $10 to $15 million due to the shutdown in January 2019. However, the company went on to report record revenue of $5.1 billion during the first three months of that year.
While historical data suggests that the impact of a potential shutdown starting on October 1st may be limited for airlines, it is crucial to acknowledge that each circumstance is unique. The industry has evolved significantly since the last shutdown, necessitating caution before drawing concrete conclusions about potential market performance.
The Struggles Faced by Airlines Amidst a Challenging Environment
The past year has been tumultuous for the airline industry. While late 2018 and early 2019 saw a rally and a strong fourth-quarter earnings season, airlines are currently grappling with numerous challenges. From surging fuel prices to a potential slowdown in domestic demand, the industry is facing mounting headwinds.
Unfortunately, these issues have taken a toll on airline stocks, with the U.S. Global JETS exchange-traded fund (JETS) plummeting by 21% since its peak in July.
Adding to the already difficult situation, the prospect of another government shutdown looms, and the potential consequences could be severe. According to the U.S. Travel Association, a shutdown this year would have an even greater impact than its predecessor. The organization estimated that it would cost the U.S. travel economy a staggering $140 million per day. This surpasses the estimated losses of $100 million per day experienced during the previous shutdown from 2018 to 2019.
Furthermore, the U.S. Travel Association highlighted that a shutdown would not only result in financial losses but also hinder the air travel system itself. More flight delays, longer screening lines, and setbacks to modernization plans are anticipated consequences. Additionally, it is projected that 60% of Americans would cancel or avoid air travel if a shutdown were to occur, exacerbating the industry’s challenges.
In summary, the airline industry finds itself in a precarious position as it navigates through numerous obstacles. With fuel prices on the rise and signs of a potential demand slowdown, coupled with the looming specter of a government shutdown, airlines must remain prepared for further turbulence ahead.
