Airlines Keep Industrials Sector Earnings Grounded in Q1'17

Airlines have been a focus for the market during the past week, due in large part to the release of a video showing a passenger being forcibly removed from a United Airlines flight on April 9. Following the incident, the price of United Continental Holdings stock has declined 2.2% since Monday.

From an S&P 500 earnings perspective, the Airlines industry is expected to report the largest year-over-year decline in earnings (-50%) of all 12 industries in the Industrials sector for Q1 2017. All five companies in this industry are expected to report a year-over-year decline in EPS, or have already reported a year-over-year decline in EPS for the quarter.

In fact, this industry is the largest contributor to the expected year-over-year decline in earnings for the Industrials sector (-7.0%) this quarter. If the Airlines industry is excluded, the expected earnings decline for the sector would improve to -0.7% from -7.0%. At the company level, American Airlines Group and Delta Air Lines are the largest contributors to the earnings decline for the sector. The mean EPS estimate for American Airlines Group for Q1 2017 is $0.54, compared to year-ago EPS of $1.25. Delta Air Lines reported actual EPS of $0.77 for Q1 2017, compared to year-ago EPS of $1.32.

Bracing for Turbulence

What is driving the expected weakness in earnings in the Airlines industry for Q1'17?  In the company’s earnings release, Delta Air Lines discussed lower operating revenues (due in part to currency) and higher fuel costs.

“Delta's operating revenue for the March quarter was down $103 million versus prior year, including $20 million of lower year over year currency hedge gains. Passenger unit revenues declined 0.5 percent on 0.5 percent lower capacity….Adjusted fuel expense increased $327 million compared to the same period in 2016 due to 52 percent higher market prices.” –Delta Air Lines (April 12)