Market MovesJanuary 17, 2020

Airline Stocks Fly High Despite Boeing MAX Mess

Thriving economy and trade war pause aid carriers, despite loss of tainted plane.

Reported by Larry Light

Lord knows when the grounded Boeing 747 MAX will return to service. But is that weighing on the airlines’ stocks? Nope.

They’ve taken flight over the past 12 months, with carrier stock prices rising 9.1%, using the US Global JETS exchange-traded fund as a gauge. Sure, that trails the S&P 500 (up 25.8%), but the broad-stock index is driven by glamorous tech stocks, and airlines aren’t that. Individual companies’ performances vary, of course. Stock in Delta Air Lines, the largest by revenue, is ahead 22%.

Yes, there may be some impact on profitability, but a still-strong economy and a truce in the US-China trade war are tail winds for the airlines. As Raymond James analyst Savanthi Syth put it in a recent report, “The potential short-term supply shock from the return to service (RTS) of the Boeing MAX fleet is likely to weigh on 2020 yields, but we believe the pressure is overestimated.”

The economy has provided a solid base of passenger demand. “Heading into 2020, both leisure and business demand appear healthy,” she wrote. She noted that January will be “an important proof point as corporate travel budgets are set for the year ahead.”

The biggest loser in the MAX imbroglio, certainly, is plane maker Boeing, which thus far has lost more than $10 billion in revenue and has seen its CEO ousted. The narrow-body MAX was grounded by authorities all over the world in March, following two deadly crashes that killed 346 in Indonesia and Ethiopia. The company is scrambling to fix software and other glitches linked to the disasters.

Syth’s report emphasized the economy’s health as a spur for air travel demand. Despite a modest deceleration expected in the US economy, from 2.4% estimated growth in 2019 to 2.1% this year, seats are full.

In response to the MAX problem, airlines have shrunk their flight schedules and have pulled out of markets that were marginal for them. Southwest Airlines, a large user of MAX jets, has hastened its exit from Newark Liberty International Airport, where it didn’t do enough business.

The downside for the industry is that labor costs, especially those of pilots, are up, which could temper airlines’ results.

Once the MAX returns to service, as most observers expect the plane will, it should ease any concerns. The biggest hurdle then will be getting passengers to fly in the controversial aircraft.