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Will Turbulence Divert Future Flight for Airline Stocks?

We look at airline industry troubles and offer thoughts on current valuations.

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The domestic airline industry has been one of the worst-performing industries in history, cumulatively losing money from its inception. The past decade proved to be particularly trying, as the 9/11 attacks, the oil-price surge, and the 2008 recession forced the industry to adopt and change course abruptly. Impressively, the domestic industry survived the past three years without any major bankruptcy, and the shares have rallied substantially since, causing us to rethink both our valuations and our thesis on the airline industry. In this piece, we analyze the financial effect of oil prices, explore the financial burden of the 9/11 fees, and explain our thoughts on the industry's current valuation.

Rising Oil Prices
The airline industry has endured substantial obstacles in the past, but rising oil prices over the last decade proved nearly disastrous. When the major legacy carriers emerged from bankruptcy beginning in 2005, business plans forecasted oil prices of $80 per barrel, and some industry participants commented how difficult it would be for the industry to cope with oil prices above $100 per barrel. Although airlines have traditionally offset rising fuel prices through ticket price increases, we believe intense competition has stopped the industry from passing along the entire increase.

Basili Alukos does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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