By Teresa Rivas

Many people have dreamed that they could fly. Investors are paying the price for believing that airline stocks could.

Airline stocks have a long history of disappointing investors. Since the start of 1990, the S&P 500 Airlines Industry index has returned 1.4% a year, including reinvested dividends, lagging behind the S&P 500's 10.4% return. The index reached a record high on Jan. 5, 2001, before 9/11 caused the group to tumble, and every time airline stocks looked ready to regain that level since then, something happened -- a financial crisis and a pandemic among them -- to cause them to lose altitude.

This time looked different. Airline stocks soared 95% from their August low through their January high, and as recently as last month, analysts were predicting blue skies. That was particularly true for legacy carriers like Delta Air Lines, United Airlines Holdings, and American Airlines Group following upbeat earnings results, consistent demand, and strong pricing. The airlines index needed to gain just 25% to reach its all-time high.

It wasn't meant to be. The stocks have tumbled following a spate of bad news as uncertainty around tariffs and trade policy crush consumer and corporate confidence. It's not just sentiment. United, Delta, American, and Southwest Airlines provided warnings about the first quarter this month, and the sudden weakness in demand is coming from all quarters. Southwest cited a slowdown in government travel, and United said it had seen government-related bookings slashed in half. Delta warned that corporate spending is stalling. And Allegiant Travel, which focuses on leisure travelers, said earlier this week that it was seeing softening demand.

"Travel stocks are down 20% over the past month as the market attempts to position around a slowing economy and a consumer that has paused spending given a dip in confidence," noted Melius Research analyst Conor Cunningham. "There was an attempt to calm fears with comments around stability in April, but given the swift change in the backdrop, those comments were quickly dismissed."

What's more, the chaotic rollout of tariffs has made even the wealthy nervous and businesses less willing to open their wallets. "Price-sensitive leisure travelers and corporates in sectors that are highly levered to U.S. policy have exhibited more caution," writes TD Cowen analyst Tom Fitzgerald. "This caught airlines off guard.... Demand was robust in the fourth quarter, and that strength continued into January."

Looking ahead to what might reverse the losses, Cunningham admits that "there isn't much out there." It's the seasonally weakest quarter and the one that has the least impact on earnings. As a result, investors may ultimately forgive any near-term weakness should demand rebound in the key summer period. Or, if nothing else, a downturn would let airlines show that they have finally learned to refrain from slashing fares when things get tough, destroying their margins and pricing power in the process.

History doesn't have to repeat itself. Fitzgerald argues that the stocks -- particularly legacy carriers -- have dropped too much given what we know so far, and investors shouldn't rush to judgment yet.

"If demand and consumer sentiment can stabilize, airlines may be able to generate a better peak season than is currently feared," he writes. "However, we acknowledge this is an incredibly fluid dynamic and that airline traffic tends to be a coincident indicator. It's good until it isn't."

And vice versa.

Write to Teresa Rivas at teresa.rivas@barrons.com

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(END) Dow Jones Newswires

March 21, 2025 21:30 ET (01:30 GMT)

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