Why Airline Stocks Are Down Today

Source Motley_fool

Airlines are likely not the first industry that comes to mind when discussing tariff impacts, but the sector is down big following Wednesday's broad tariff announcement.

Shares of United Airlines Holdings (NASDAQ: UAL) are down 13% as of 10:30 a.m. ET. Meanwhile, shares of Frontier Group Holdings (NASDAQ: ULCC) and JetBlue Airways (NASDAQ: JBLU) are down 11% apiece, leading a broad sell-off in the sector.

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Second-order effects

Airlines are in the business of transporting people from point A to point B, and people on international flights are not subject to the tariffs announced Wednesday. But that doesn't mean the industry will escape with no economic impact.

Following the tariff announcements, a number of Wall Street banks predicted the risk of a near-term recession was on the rise. Travel has historically been a cyclical business because it is discretionary: If times are tough and families are having a hard time paying their bills, the obvious choice is to not take a vacation. As a result, hotel and cruise stocks are also feeling the impact.

Last month, United and rivals warned of weakening market conditions. Thursday's sell-off is likely investors worrying about a further falloff in demand heading into the key summer vacation season.

The airlines also could see the price of spare parts and fuel go up as economic conditions evolve, potentially putting added pressure on costs at the same time demand is falling.

Are airline stocks a buy?

The good news is that the industry is much healthier than it was heading into previous down cycles, providing hope that even if things get worse from here, the companies can avoid changing course and heading into bankruptcy.

That said, all indications are that demand could suffer from here. Consumer confidence hit a four-year low in March, and corporate travel is mostly grounded.

Investors will get an update in the weeks to come as the airlines release first-quarter results. This is typically the quarter where airline CEOs provide insights into summer demand trends. An upbeat forecast could help reverse the decline, but somber earnings calls could accelerate the sell-off.

Given the risks, investors are likely best served by remaining in the waiting area for now.

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