Travel Ban Partially OK'd: What's In Store For Airlines?

In what can be seen as a victory for the Trump administration, the U.S. Supreme Court has reinstated major parts of the President’s travel ban. While allowing major parts of the embargo to take effect , the court said that it will be up for review in October.

The Ruling

The country’s top court ruled in favor (partially) of the U.S. government’s request to do away with preliminary injunctions against ban. Consequently, visitors from six predominantly Muslim nations - Iran, Libya, Somalia, Sudan, Syria and Yemen - are banned from entering the U.S. for 90 days.

The court also upheld the provision of the ban to suspend the admission of refugees for four months. Additionally, the ruling restricts the number of refugees entering the country to 50,000 this fiscal year. In fact, While making the above rulings, the court added that visitors from the above countries to the U.S. won’t be affected if they are able to prove a bona fide relationship with a person or entity in the country.

We remind investors that initially President Trump issued a ban on travelers from seven predominantly Muslim nations – Iraq, Iran, Syria, Yemen, Sudan, Somalia and Libya – from entering the U.S. in January. However, courts refused to reinstate the ban. Notably, following the opposition, a narrower version was issued by the President in March.

What’s Ahead for Carriers?

The partial reinstatement of the ban, which is aimed at preventing terrorism in the U.S., negatively impacted airline stocks like Delta Air Lines (NYSE:DAL) , United Continental Holdings (NYSE:UAL) and American Airlines Group (NASDAQ:AAL) due to fears of declining travel demand. All these three carriers carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In fact, many carriers including big players like American Airlines Group have exposure to Africa and the Middle East. Consequently, their fears of shrinking travel demand cannot be ignored. To this end, their top line may shrink significantly in the near term.

We note that the initial announcement of the ban in January not only hurt stocks in the space severely but also reportedly resulted in a decline in international bookings to the country.

Other Headwinds

Apart from the ban issue, the ambiguity regarding the laptop ban and President Trump’s revised Cuba policy that bans individual travel to the island nation, are some other administrative challenges confronting airlines.

Furthermore, the surge in labor costs has been hurting the bottom line of carriers for quite some time due to the signing of labor deals. In the first quarter of 2017, growth on the bottom-line front was hardly visible for airlines due to high costs. Increased costs are expected to hurt the bottom line of carriers in the second quarter as well.

For example, Hawaiian Holdings (NASDAQ:HA) expects cost per ASM (CASM), excluding fuel and special items, to increase in the band of 4.5% to 7.5%, mainly owing to the sixty-three month pay-related deal cleared by its pilots in Mar 2017. Moreover, fuel cost per gallon (economic) is projected to be in $1.60 to $1.70 range, which is higher than $1.55 recorded in the second quarter of 2016.

Similarly, Allegiant Travel Company (NASDAQ:ALGT) expects CASM excluding fuel, to increase in the band of 13–15% in the second quarter of 2017 , mainly on the back of implementation of the new pilot agreement. Also, Alaska Air Group (NYSE:ALK) recently increased its second quarter forecast CASM (excluding fuel and other special items) following the pay-related agreement with the pilots of its subsidiary Horizon Air.

Apart from high costs, carriers such as United Continental Holdings and Spirit Airlines (NASDAQ:SAVE) have been laid low by customer-related issues.

Conclusion

With stocks in the space already grappling with the above-mentioned headwinds, the U.S. Supreme Court’s move of partially reinstating the ban, presents another challenge for sector participants. However, the exact extent of the impact on the space can be gauged with the passage of time. Naturally, we expect investors interested in the space to eagerly await updates on this burning issue.

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