Why Missing EgyptAir Flight Hit U.S. Aviation Stocks So Hard

  • Boeing is among sharpest decliners of Dow industrials
  • Effect on U.S. airlines ‘a bit misguided,’ analyst says

U.S. airline and aerospace stocks fell on concern that Americans may be reluctant to travel to Europe following the crash of an EgyptAir jetliner during a flight from Paris to Cairo.

Boeing Co. declined the second most among members of the Dow Jones Industrial Average, while the Bloomberg U.S. Airline Index fell 1.8 percent Thursday in New York amid a broader market decline. 

Egyptian Minister of Aviation Sherif Fathy raised terrorism as a probable cause of the Airbus Group SE A320 jetliner crash. If that proves to be the case, demand for air travel could be sapped in the lucrative trans-Atlantic market that already was tested by recent attacks in Brussels and Paris. Such weakness could spill over to Boeing and its suppliers.

“If airlines see demand contraction, then that’s just one less reason to buy airplanes,” said Robert Mann, an aviation consultant. “Europe is still relatively soft economically. There is still a hangover effect from the Brussels and Paris terrorism incidents.”

Order Cushion

Boeing has a large cushion of orders to help it withstand a downturn. But the U.S. planemaker’s near-record backlog of 5,740 unfilled jetliner orders trails that of European rival Airbus by almost 1,000 aircraft, according to data compiled by Bloomberg Intelligence.

Any slowdown in global aircraft sales would be keenly felt at the Chicago-based manufacturer, which is counting on higher output of its 787 Dreamliner and single-aisle 737 to counteract slowing sales of the 777, its second-largest profit driver.

Boeing declined 2.2 percent to close at $128.08, while Airbus rose less than 1 percent to 53.33 euros in Paris. The U.S. planemaker’s stock has declined 11 percent this year, third worst among the 30 members of the Dow industrials.

Thursday’s drop in U.S. airlines and why they generally fared worse than European counterparts stumped Janus Capital Group analyst Kristopher Kelley. Part of the decline was because of the natural volatility of airline stocks. If the broader U.S. market falls by 1 percent, airlines seem to go down by 3 percent, he said.

‘Bit Misguided’

“I’m sure the EgyptAir crash has something to do with it, and the related uptick in fear related to terrorism, but the direct correlation seems a bit misguided to me,” Kelley said. The U.S. “should be more insulated than euro carriers, so that one, in particular, is odd.”

Investors who were concerned about the U.S. economy, may be further inclined to shun Boeing and already weak airline stocks because of the EgyptAir incident, said Chris Higgins, an analyst at Morningstar.

“I think the EgyptAir crash is the principal driver of the declines,” said Jack Atkins, an analyst at Stephens Inc. “Given the flight originated in Paris, it raises additional concerns about terrorism in Europe right at the start of the Summer travel season.”

The U.S. to Europe market is one of the most profitable for U.S. airlines that partner with European carriers on trans-Atlantic flights. Delta Air Lines Inc. generates 15 percent to 20 percent of its revenue from trans-Atlantic flights, the company said in an April earnings call with analysts.

Revenue Drops

Yet the market also is the “most challenging” right now, according to presentations the Atlanta-based airline gave to analysts on Monday. An increase in seating capacity from low-cost airlines, Canadian airlines and Persian Gulf carriers has created a difficult environment, Wolfe Research analyst Hunter Keay said in a follow-up report.

Delta’s revenue from each seat flown a mile in the trans-Atlantic market fell 6.4 percent in the first quarter. United Continental Holdings Inc.’s comparable revenue declined 8.9 percent. Delta shares fell 1.7 percent to $43.10, while United dropped 2.8 percent to $44.01.

“Capacity growth at plus-12 percent at an industry level is way too high,” Keay said.

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