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Why airline stocks are falling today

What happened

Inflation in the United States has recently increased at its fastest rate since 1981 and consumer confidence is falling. Those economic indicators raise questions about the ability of the American consumer to keep spending.

In times of uncertainty, it can be difficult to make expensive discretionary purchases like airline tickets. Investors are running for emergency exits, sending airline stocks including United Airlines Holdings (UAL -3.61%), American Airline Group (AAL -4.91%), Southwest Airlines (LUV -4.52%)Y delta airlines (DAL -4.43%) down about 5% each.

And that

Airline investors are understandably nervous. The industry started the year on a shaky footing, hit by the pandemic and the dramatic drop in travel demand that followed. Strong pent-up demand for vacation travel this summer has planes packed, but a combination of labor shortages and high fuel costs are limiting the upside for airlines.

The last thing the industry needs right now is a drop in demand after the summer. However, with inflation skyrocketing, there is a real risk that Americans will look for ways to tighten their belts. If the choice comes down to buying groceries or buying plane tickets, plane tickets will go.

United, American, Southwest and Delta combine to control over 80% of the US market, and none can afford to get into fare wars with lower-cost options like spiritual airlines (SAVE MONEY -0.04%) either border tenure group (ULCC -2.65%). In normal times, business and international demand could offset some of the drop in leisure travel, but both have been slow to recover after the pandemic, and it’s not certain that corporate travelers will fill all seats once the pandemic ends. summer.

On a day when investors are panicking and markets across the board are down more than 2%, investors are in no mood to wait and find out what the threat of inflation will mean for airlines in the coming months.

Now what

The damage could have been worse were it not for the US government’s decision to waive COVID testing requirements for arriving international travelers. The travel industry had been pushing for the change, saying it was a drag on international demand.

That’s a bit of good news on a down day, but not enough to overcome the wall of uncertainty clouding the outlook for these airlines’ stocks. For those with a long enough time horizon, Delta and Southwest are two major carriers and should be able to recover faster than the industry as a whole. But under current macroeconomic conditions, that recovery could take years, meaning there’s no reason to rush in and buy the dip.

Airlines are in a holding pattern for now. Until these storm clouds dissipate, investors shouldn’t expect these stocks to take off.

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