Transports fall flat due to airline underperformance

Transport stocks are in a jam, and it's mostly because airline stocks haven't taken off.

The Dow Jones transportation index has fallen 3 percent in a week, badly lagging the Dow industrial average. The culprit may be because of airlines: Despite most airlines beating their first-quarter earnings estimates, revenue hasn't met the mark.

"What's really happened is most of the airlines reported their April revenue numbers this past week, and it's the airlines stocks that are pulling down the index," Erin Gibbs, S&P Investment Advisory's chief investment officer, said last week on CNBC's "Trading Nation."

The decline follows a drop in passenger numbers, the airlines' biggest source of revenue. In its April earnings call, American Airlines said passenger revenue was down 4.2 percent, while United predicted that its passenger unit revenue will decline about 6.5 to 8.5 percent during the second quarter. Relatively smaller airlines like JetBlue also reported a drop in passenger revenue, highlighting the widespread nature of the issue.

"There have been some disappointments about capacity, lower revenue per passenger, and basically some concerns, and they're the ones that are pulling down the index," said Gibbs.

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However, the analyst doesn't see airlines' short-term downtrends as a sign for long-term worry. She believes that many airlines are still set to make impressive profits during the year.

Gibbs said one airline to watch is Delta, which reported a 27 percent increase in net income during the first quarter. Delta's prospects, as well as those of other airlines, could help transports climb back in the markets.

Additionally, oil prices in the next few months could help airlines take flight once more. As Chantico Global founder Gina Sanchez indicates, low oil prices result in lower costs to fuel planes — which could help airlines down the line if the crude rally ends.

"Low oil prices have been a blessing for airlines because of jet fuel pricing," said Sanchez. "But we have a negative outlook for oil prices for the rest of the year because we just don't see production coming down, so that could actually be a boost for airline stocks going forward."

Sanchez believes that oil prices could be a concern in 2017. Yet in the short term, airlines should rise again once oil prices decline.


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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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