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As we soar into the year’s second half, the seemingly sunny skies for airline stocks appear cloudier. The hot streak in the first half will likely tempt investors to buckle in for a profitable journey. However, as we look closer, the proverbial airline stocks to avoid signs may be urgently flashing.
Travel may have jetted off to record levels over the bustling 4th of July weekend, but a string of delays and cancellations tell a different story. Shaky booking trends over the past month further rattled investor confidence.
Furthermore, rising capacity pressures, delivery delays on new aircraft orders, staff shortages, and higher ticket prices add to this turbulence. The sector continues to grapple with looming recession headwinds threatening to weigh down demand. So, it might be the right time for those with riskier portfolios to consider offloading airline stocks with risk before the potential storm hits.
Southwest Airlines (LUV)
Southwest Airlines (NYSE:LUV) was once one of the most cost-efficient airliners in the aviation world but is soaring through turbulent skies. Alarming trends emerge as the firm grapples with inflating costs, surpassing its rivals. Analysts from CFRA paint a precarious picture for the airline, with roughly 95% revenue reliance on domestic exposure, leaving it vulnerable amidst recession-induced consumer hesitation.
Moreover, the company has effectively revised its unit cost outlook, forecasting a 1% to 2% year-on-year drop compared to the earlier 2% to 4% decrease. Meanwhile, labor contract negotiations loom ominously, threatening to weigh down its bottom-line results further. Jefferies, in response, has trimmed its 2023 operating income forecast by a substantial 30%, down to $1.4 billion.
Now dethroned from its once-coveted king of the hill status, Southwest must prove it can navigate the altered strategic landscape. With dwindling financial indicators, it’s time for management to reveal a robust blueprint.
Allegiant Travel Company (ALGT)
Allegiant Travel Company (NASDAQ:ALGT), a cherished facilitator of leisure travel, bridges the gap for residents of America’s less-served cities. However, navigating the uncertain macroeconomic climate and escalating labor costs overshadow its performance in the year’s second half.
Positive EPS revisions offer a glimmer of optimism, but Allegiant is far from ready for a smooth landing. Recessionary pressures and growing labor costs continue to fuel investor unease. In addition, turbulence caused by lingering issues with the 737 MAX cannot be ignored. Consequently, TipRanks maintains a consensus Hold rating for Allegiant Air.
According to GuruFocus, ALGT is a possible value trap, exhibiting growth and financial strength ranks of 3/10 and 6/10, respectively. Operational metrics across both lines lag behind its peers, with its free cash flows firmly in the red.
Hawaiian Holdings (HA)
Hawaiian Holdings (NASDAQ:HA) offers a striking contrast to the thriving airline industry post-pandemic period. While most legacy and low-cost airlines ride high on the recovery wave, Hawaiian continues to navigate choppy waters.
Hawaiian Airlines is expanding its capacity to the U.S. Mainland and stirring up the slow-paced recovery. However, this endeavor faces turbulence as five A321neos remain grounded. Moreover, at a time when other airlines celebrate record profits, Hawaiian Holdings consistently posts net losses, painting a bleak picture over the past couple of years, a trend unbroken in recent quarters.
Granted, the market is buoyed by the prospect of imminent profitability, thanks to potential factors such as strong demand from Japanese travelers. But skeptics would argue that such a recovery is already factored into HA’s stock valuation. Thus, the Hawaiian story underscores the need for a strategic rebound that could reposition it favorably in the current market scenario.
On the date of publication, Muslim Farooque did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.