3 Airline Stocks to Sell Now

Investing in airline stocks is not for the risk-averse even in the best of times. Coming out of 2019, some airline stocks were looking to be good buys. Strong earnings, an apparent breakthrough in the trade dispute with China, and apparent clarity on when Boeing (NYSE:BA) would be clear to start delivering its beleaguered 737 Max  planes, were all reasons for investor optimism.

But this is a sector known to be more at risk than most to “black swan” events. And for many airlines, 2020 is becoming a year they would already like to forget. First, the industry has come to realize that the issues involving Boeing’s 737 Max are far from resolved. And while nobody in the industry is suggesting that safety should not be paramount, the airlines are relying on this inventory.

The second event has been the outbreak of the coronavirus has caused many airlines to cancel all flights to China. It’s important to note that this is different than a belief that travelers may decide not to fly. This is an actual cancellation of flights, and the revenue that comes with them. For an economy that is heavily interdependent on China, it’s only natural that some investors are looking to sell.

Here are three stocks that look to be at a particular risk during this turbulent time.

United Airlines (UAL)

The good news for United Airlines (NYSE:UAL) is that the company has less exposure to Boeing 737 Max jets than some other competitors. And, because the company, has those jets stored in Phoenix, Ariz., the mild weather may make it easier for UAL to get the planes ready for service once Boeing receives regulatory approval.

The bad news is the airline is one of the most reliant on Asia. And that means the cancellation of flights to China may affect the airline more than others. Case in point, on January 17, UAL Stock was trading at approximately $90 per share. As of this writing on February 3, the stock is trading just below $76 per share.

And the ugly comes from the company’s own balance sheet that shows United is projecting zero earnings growth for 2020. Plus, capital expenditures (CapEx) may increase by as much as $2 billion which will impact the company’s free cash flow (FCF).

Southwest Airlines (LUV)

Although Southwest Airlines (NYSE:LUV) has a clean balance sheet, it has more exposure to the 737 Max groundings. The company has 34 such jets in its fleet. On the positive side, Southwest does not have exposure to the Chinese market, which is an advantage that has some investors bullish on the stock at this moment.

However, the stock has been trading flat for the past 12 months, and with no immediate catalyst in sight, it’s hard to see where the stock will grow. The company has a higher valuation than many of its peers. During 2019 that was easy to justify. It’s becoming harder to justify now. If Boeing can return its 737 Max jets to service by the middle of  the year (the current estimate), Southwest may be in a position to see its stock rise quickly. But for right now, it seems like a stock that is at best going to tread water.

Delta Airlines (DAL)

Some investors may be surprised to see Delta (NYSE:DAL) on this list. After all, the company had, by airline stock standards, a blowout earnings report in the fourth quarter. And the company does not have exposure to the 737 Max jets. However, following the law of unintended consequences, the company is struggling with cost containment as a result of picking up extra passenger traffic from other airlines.

The larger issue I see for Delta on a short-term basis is their announcement that they are suspending all flights to China starting on February 6 through April as a result of the coronavirus outbreak. The airline currently offers 42 daily flights to China so this will have an impact on revenue in the first quarter and part of the second quarter. I typically applaud companies for “doing the right thing”. However doing the right thing for your customers is not the same thing as doing the right thing for shareholders.

Delta stock is still up about 10% in the last 12 months, but it has given up about 10% since the beginning of the year. Right now, it’s a stock that may be among the best of a bad lot, but it still will face a loss of revenue that will be hard to overlook.

What is the long-term outlook for airline stocks?

The thing about black swan events is that they are moments in time. The airlines will recover from these events, but it’s hard to say when that will happen. That’s why, for now, it’s best for investors to stay on the sidelines.

For those investors who want to stay in the sector, an airline exchange-traded fund (ETF) may be a less volatile alternative. These funds invest primarily in airline stocks, but also cover airline services and manufacturing, air freight, and logistics as part of the broader transportation sector. The iShares Transporation Average  ETF (IYT) is a good example of an airline ETF that is diversified over the entire sector. In the six months ending with the last trading day of January 2020, this ETF was up by nearly 15%.