Nor'easter Cripples Airline Operations: What Lies Ahead?

Airline operations have been disrupted severely over the last couple of days due to the deadly nor’easter in the Mid-Atlantic and Northeast of United States. Notably, this winter storm has impeded travel plans and caused harassments to passengers. It caused heavy snowfall accompanied by hurricane-force winds in excess of 120 kilometers per hour in the affected areas.

Flight Cancellations at Large Due to the Storm

With the storm disrupting normal life, it is of little wonder that travel plans were thrown haywire as major airline operators had to cancel multiple flights. In fact, the severity of the storm can be realized from the fact that approximately 4000 flights were cancelled in the United States by various carriers like American Airlines Group Inc. (NASDAQ:AAL) , Delta Air Lines, Inc. (NYSE:DAL) and United Continental Holdings, Inc. (NYSE:UAL) since Mar 2, 2018.

While Delta and United Continental carry a Zacks Rank #2 (Buy), American Airlines has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The worst scenario was on Friday with carriers in the United States cancelling 3,423 flights while more than 4,000 were delayed. In fact, operations were disrupted severely at hubs like Boston, New York and Philadelphia.

More Worries Loom Ahead?

Although the winds have weakened, storm-related harassments still linger, thousands of homes in eastern United States are still without power. According to a Reuters report, coastal areas of Maine, MA, among others might still be affected by floods and extreme high tides.

To compensate for the harassment of passengers, who had planned to travel in the affected period, most carriers including American Airlines, Delta and JetBlue Airways Corporation (NASDAQ:JBLU) are offering various facilities. For example, they can opt for change of flights without incurring any extra cost.

Some Similar Incidents

Weather-related issues have hurt airlines previously as well. In January 2018, operations at carriers were disrupted by winter storm Grayson. Last year, back-to-back hurricanes (Harvey, Irma and Maria) dented airline operations significantly.

Also, winter storm Stella had crippled airline operations considerably by impeding travel. In 2016, Hurricane Matthew had spelt doom for airlines, causing extensive damage. In fact, such acts of nature hinder the schedules of carriers, thus causing multiple flight cancellations.

Other Factors Hurting Airlines

Apart from the storm-related disruption in operations, airlines have been confronted with a few other challenges.

Of late, the disagreement between legacy carriers — American Airlines and United Continental — pertaining to gate allocation at Chicago's O'Hare International Airport has been grabbing headlines. Both carriers, having major hubs at Chicago’s largest airport, are levelling charges against each other. Unless resolved quickly, this issue might snowball into a major crisis.

Moreover, fears related to capacity overexpansion were re-ignited with January traffic reports of most carriers like Alaska Air Group, Inc. (NYSE:ALK) , exhibiting a fall in load factor (percentage of seats filled by passengers). The downturn can be attributed to capacity expansion outweighing traffic growth.

We remind investors that shares of United Continental declined significantly in January, even after reporting better-than-expected results in the fourth quarter on issues related to capacity.

On the fourth-quarter conference call, the company stated that it will continue expanding capacity in a bid to maintain market share at major airport hubs to deal with competition from discount carriers like Spirit Airlines, Inc. (NYSE:SAVE) . For 2018, United Continental’s capacity growth is projected between 4% and 6% year over year. The metric is anticipated to increase in 2019 as well as 2020.

Furthermore, airfares have declined for three successive months in the United States. Generally, carriers are forced to reduce fares as unit revenues decline in the face of capacity outpacing demand growth. While low air fares seem to be favorable for fliers, it becomes a drag on the company’s top line with their profits being hurt.

In addition to the above challenges, the rise in fuel costs also does not bode well for carriers. Evidently, fourth-quarter earnings declined at the likes of Hawaiian Holdings, Inc. (NASDAQ:HA) on high fuel costs.

Price Performance

In view of the above headwinds, it is of little wonder that the Zacks Airline industry underperformed the broader market in a year’s time. The S&P 500 Index has gained 13.7% compared with the industry’s rally of 10%.

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