What happened
America's pandemic-ravaged air travel industry was in focus on Wednesday as investors turned their attention to rising interest rates and the potential for stock market declines. Some of the biggest U.S. airlines fell in response:
- American Airlines Group (NASDAQ: AAL) closed down 2.6%.
- Southwest Airlines (NYSE: LUV) fell 3.3%.
- United Airlines Holdings (NASDAQ: UAL) and Delta Air Lines (NYSE: DAL) both closed down 3.7%.
Image source: Southwest Airlines.
So what
Basically, every major airline stock is down. But why?
Speaking in Minneapolis on Tuesday, Federal Reserve Governor Lael Brainard warned that the Fed intends to "continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting."
Bond markets responded immediately to that prospect: The yield on the 10-year Treasury note rose roughly 14 basis points to 2.55% as investors shifted some of their attention away from stocks and toward bonds.
Granted, an increase of 14 basis points in bond yields may not sound like much, but in percentage terms, that's a 6% increase in the cost of debt. As it just so happens that airlines are some of the most indebted companies on the block, and thus have a lot to lose from higher debt costs. According to data from S&P Global Market Intelligence:
- American Airlines' total debt, net of cash, stands at $33.8 billion -- against a market capitalization of only $11.6 billion.
- United is a bit better off with $22.7 billion in net debt and a market capitalization of $14.5 billion.
- Delta's sitting relatively pretty with $24.5 billion in debt -- which is a lot, but is at least less than its market cap of $24.9 billion.
- By contrast, Southwest remains the crown jewel of the industry, with a $26.8 billion market cap and $3.2 billion in net cash.
Now what
High debt levels in an era of rising interest rates increase the risk that a company won't be able to pay its debts. Even in a less-worst-case scenario, though, higher interest rates on high levels of debt mean more money going to pay interest on debt, and less money falling to the bottom line as profit for investors to share in.
If you're inclined to view Wednesday's sell-off in airline stocks as less of a disaster and more of an opportunity, you might want to start your search with the sole airline on this list that isn't carrying net debt: Southwest Airlines.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Delta Air Lines and Southwest Airlines. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
