Is The Party Over For Airlines?

After seven consecutive years of profitability for the U.S. airline industry, is the party over? Some stock-market experts sure think so.

While those analysts aren’t quite ready to dump airline stocks, they are taking a more conservative approach for 2017 as fuel costs begin to rise again—along with labor costs.

For instance, according to The Motley Fool, investment house Cowen & Co. last week downgraded five airlines—American, United, JetBlue, Alaska and Spirit—but the downgrades were conservative, from out-perform to market perform.

United appears particularly vulnerable. It suffered a cut to its target price from $77 a share to $75, according to data from StreetInsider.com. Cowen believes there's some hope for United Continental stock to rise this year, but only about 2.5 percent, which is not enough to justify a buy rating.

“With the tailwinds from mergers, decreased capacity/more efficient flying, and falling oil prices all behind them, analysts quoted by S&P Global Market Intelligence see profits falling steadily at both American and United, and Alaska Air as well, over the next five years,” The Motley Fool predicted. “Discount carriers are expected to fare better, with Spirit growing profits as much as eight percent annually over the next five years, and JetBlue five percent.”

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The Wall Street Journal noted that Delta Air Lines’ earnings release on Thursday will send a signal to the industry about where it is headed, though Delta has already warned that higher costs will shrink its operating margin. Even the International Air Transport Association (IATA), the lobby group that represents airlines, has said it believes global airline profits will start to decline this year.

Don’t get the impression that it’s a dire time for aviation. According to MarketWatch, airline shares gained about 29 percent in the fourth quarter, while valuation multiples for the sector climbed 37 percent.

“We do not believe this is the end of the airline cycle,” Cowen analyst Helane Becker wrote in an analysts’ note. “We believe with the recent positive trend in the shares and subsequent upward multiple moves, the group is due for a break.”