U.S. airline carriers are under pressure this week in reaction to a triple whammy of mixed earnings, coronavirus fears, and The Boeing Company's (BA) latest rollback in the re-certification of the 737-MAX jetliner. This bearish brew wasn't expected after Delta Air Lines, Inc. (DAL) kicked off the sector's earnings season on a high note last week, beating fourth quarter profit estimates and reporting healthy revenue growth.
Delta and its peers sold off after initial reports from China raised fears that travelers will stay home in 2020 rather than risk coronavirus exposure through infected parties. Investors then ignored a positive Tuesday report from United Airlines Holdings, Inc. (UAL), triggering a reversal that has dropped the stock to a four-month low. Adding to downside pressure, long-term laggard American Airlines Group Inc. (AAL) reported another weak quarter, missing profit estimates while barely meeting revenue expectations.
This decline could mark a major turning point for the sector, which has failed to break out with the Dow Jones Transportation Average in the past two years. These are cyclical issues, highly sensitive to an economic expansion that has now entered a second decade, making it the longest growth spurt in American history. Everyone knows that good times won't last forever, and the run-up to the 2020 election could signal a major turning point in that cycle.
United Airlines came public in its current incarnation in 2006, carving a trading range between $30 and $50 into a 2008 breakdown that posted an all-time low at $2.80 in July, well ahead of the October crash. It tested new support for more than a year and turned higher into the new decade, finally stalling in 2011 under the IPO opening print in the mid-$30s. A 2013 breakout completed a round trip into the 2007 high at $51.57 in 2014, but the rally topped out a few months later, generating a resistance level that is still exerting some influence.
Price action carved two higher highs into the December 2018 peak at $97.85 and eased into a trading range that has flip-flopped through equal-sized rallies and sell-offs for more than a year. The stock is now trading at a level first reached in May 2017, telling us that frustrated shareholders have missed a big chunk of the secular bull market. Amazingly, that hasn't affected the stock's accumulation readings, which are hovering near new highs.
The most recent downturn has reached a rising trendline going back to July 2016, warning that a breakdown will signal a bearish change in sentiment that could presage much lower prices. Even so, it could be months or years before United Airlines stock finally breaks the trading range and enters a significant trend, higher or lower. In the meantime, it isn't too late to pull up stakes and find a more rewarding investment opportunity.
Southwest Airlines Co. (LUV) beat fourth quarter profit estimates by $0.07 per share and met revenue expectations on Thursday, but investors still walked away, dropping the stock more than 2.5%. It has been stuck in a trading range since breaking out above two-year resistance in the $40s after the presidential election and stalling in the mid-$60s in July 2017. A 2018 breakout attempt failed, reinforcing resistance that remains in place more than two years later.
Price action has bounced off the 50-month exponential moving average (EMA) since October 2018, but resistance in the upper $50s hasn't been penetrated in15 months. A decline from the currently traded level could reach a rising highs trendline going back to July 2015 that is coming into narrow alignment with the moving average. This marks the major balance point between bulls and bears, while the outcome of a support test may dictate Southwest's trend in the first half of the new decade.
The Bottom Line
Airline carriers are selling off in reaction to multiple headwinds that could end their long-term uptrends.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.