Author: Tim Sharp
Researcher: Jack Williams
Published: September 22, 2023
As the holiday season comes to a close and the out of office announcements begin to dissipate for the year, we dive into transportation as a sector, with particular attention to airlines and whether the recent stall in share prices is telling of greater problems further along their flight path.
The US500 Transportation index has enjoyed a monstrous climb since the turn of the year, rising by over 15% from the start of January to its peak around the end of July. Since, performance has reversed, declining 10.7% to current levels.
Figure 1 – US Transportation Index (Refinitv Data/Hottinger)
Demand for transportation services softened as both imports and exports fell within the US, further exacerbated by consumers continued prioritisation of services, experiences and entertainment and turning a blind eye to goods since the ending of the pandemic period.
Furthermore, this change in consumer behaviours has resulted in a US inventory correction made worse by the ongoing slowdown seen in countries like China and Germany.
Let’s also not forget the mass of cost increases being faced by transporters of goods such as fuel prices and employee wages, both of which have recently crept up further.
Transport industries July 31st – September 12th:
|Air Freight + Logistics||-12.9%|
|Cargo Ground Transport||-3%|
Figure 2-Transportation Industry Performance By Subsector (Yardeni Research Inc.)
The airline industry in particular had saw a huge rally in the start of the year, flying over 34% from January to the sectors peak on July 11th, since the industry has seen share prices slide, reducing that monstrous 34% gain to just 9.2% at the time of writing.
Figure 3 – NYSE Airline Index (Refinitiv Data)
Airlines, perhaps more than most in the sector are feeling the brunt of the cost increases, American Airlines warned on Wednesday of higher fuel and wage costs eating into Q3 profits the extent of cutting their Q3 earnings expectations by more than 60%, from 95 cents per share to a guidance of 20-30 cents.
Wage Pressures on Airline Industry Through Recent Contract Negotiations:
|JetBlue||24 Month Contract||+21.5% Wage Increase|
|Delta Air||36 Month Contract||+34% Wage Increase|
|American Airlines||48 Month Contract||+40% Wage Increase|
|Alaska Airlines||12 Month Contract||+11.5% Wage Increase|
Figure 4 – Wage Negotiations Across Airlines (Yardeni Research Inc.)
With Crude Oil on the rise, having risen from a low on the year of $71.26 to $93.23 at the time of writing, this is yet another reason for Airline Operators to worry, buoyed by Saudi production cuts, summer driving season in the US, a depleted US S.P.R (Strategic Petroleum Reserve) and an uptick in travel demand over the summer with many unable/unwilling to travel through the pandemic period.
Figure 5 – Crude Oil Spot Price (Refintiv Data)
As with many industries in this complex market backdrop, Airline operators are hoping for wage pressures to ease having paid out over inflationary level hikes in pay, and for OPEC members to increase production given the current global supply shortfall and willingness of other smaller nations to step up production to take advantage of heightened prices, but for this only time will tell.
Alabi, L.O. and Nilsson, P. (2023). British Airways and union agree 13% pay rise for 24,000 staff. Financial Times. [online] 4 Aug. Available at: https://www.ft.com/content/05ad4936-16ed-4c3f-a6fc-a3d1af7dec6d.
Gunnion, S. (2023). Airline stocks lose altitude as American Airlines and Spirit cut 3Q guidance on rising fuel prices. [online] Proactiveinvestors NA. Available at: https://www.proactiveinvestors.com/companies/news/1026412/airline-stocks-lose-altitude-as-american-airlines-and-spirit-cut-3q-guidance-on-rising-fuel-prices-1026412.html.
Paraskova , T. (2023). IEA: OPEC+ Production Cuts To Send Oil Prices And Volatility Surging. [online] OilPrice.com. Available at: https://oilprice.com/Energy/Energy-General/IEA-OPEC-Production-Cuts-To-Send-Oil-Prices-And-Volatility-Surging.html.
Roa, N. (2023). Stratus Financial Blog – JetBlue Pilots Agree to Contract Extension. [online] Stratus Financial. Available at: https://stratus.finance/jetblue-pilots-agree-to-contract-extension/#:~:text=JetBlue%20Airways%20pilots%20have%20agreed,slow%20progress%20in%20labor%20deals.
Yardeni, E. (2023). Transports Flying into Headwinds. [online] https://www.yardeni.com/premiumdata/mb_230914.pdf?utm_campaign=Morning%20Briefing&utm_medium=email&_hsmi=274192225&_hsenc=p2ANqtz—qK8nPbDkFtC8uCjwUTvHJxdGUhzXE7rVmLxZDC1ge73jInYuFGv4PQYRBjJPRnal53ocIrLeixupPHIn3awKhp89noEH1mJalsaKDeem46NR2zw&utm_content=274192225&utm_source=hs_email
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