Is it Time to Sell the High-Flying Airline Stocks?
Out of the eight airline stocks that I have recommended buying over the last 18 months, seven have yielded double-digit profits, while three stocks have returned triple-digit profits. My only bad performing recommendation in the aviation industry is Spirit Airlines.
With most of the stocks up considerably since my initial recommendation, I believe investors should start taking profits off the table. Thus, I would recommend investors to sell the following airline stocks:
- American Airlines (AAL)
- Delta Air Lines (DAL)
- Hawaiian Airlines (HA)
- Virgin America (VA)
- Southwest Airlines (LUV)
However, when it comes to the other stocks, I don’t think they are as attractive as they were in the last few months, and I’d recommend investors to take profits. The two reasons why I think changed my opinion about the five airline stocks mentioned above is weak air fare environment, and bottoming crude oil price.
The entire aviation industry has enjoyed the plunge in crude oil prices. Crude is presently hovering around $45 per barrel, a lot lower than last year’s highs of $110 per barrel. While crude oil may have plunged considerably, I think oil prices are stabilizing and have bottomed. Oil prices have hovered between $40 and $50 for quite some time, and I don’t think it’ll fall to under $40 in the future.
With oil demand increasing, investors could expect prices to move up in the coming months. Clearly, the upside potential for crude oil is much higher than downside potential, which is why I wouldn’t bet against a recovery.
Crude oil prices have enabled the entire aviation sector to slash ticket prices, which has resulted in a decline in average unit revenue. Airlines are competing on price and have cannibalized some of the gains of cheaper crude. This strategy doesn’t look bad now, but if crude prices start rising again, airlines will have a tough time increasing ticket prices.
So with crude oil bottoming, I think it would be wise to sell these airlines stocks to book a hefty profit.
Airlines have cannibalized their profits by competing on price, a mistake that has resulted in many bankruptcies in the past. While the carriers will continue to enjoy nice profits in the coming months, I think they are exposed severely to an increase in crude price. Hence, I would recommend investors to book profits and sell the 5 aforementioned airline stocks.