Rising oil prices could add more pain for the beaten-down airline industry.
West Texas Intermediate crude touched highs not seen since January 2020, setting airlines up for a quandary — absorb that cost or pass it on to a consumer already wary of flying during a pandemic.
Add that to the industry's list of headwinds, Washington Crossing Advisors portfolio manager Chad Morganlander told CNBC's "Trading Nation" on Wednesday.
"This is just one of a litany of concerns when it comes to the airline industry. We would avoid these companies and that group," he said. "We believe that these companies have way too much debt. They have high embedded costs structures, making them less flexible and less profitable when you have the situations like oil going higher."
The airlines are still well off their pre-pandemic highs even as the S&P 500 has rebounded to touch fresh records this year. The JETS global jets ETF, which holds stocks such as Delta and United Airlines, has bounced nearly 100% off its March low but remains 30% from a high set a year ago. Currently trading at $22.38, it would need to rally 55% to catch up to its record set at the beginning of 2018.
"If one wants to play a post-Covid return, we would advise investors to overweight industrials like Raytheon Technology as well as General Dynamics," Morganlander said. "They, too, are in the aerospace industry. And if you want to play it another way, you could buy Disney, for the travel and leisure aspect of it. But once again, we would avoid the airline industry altogether."
The technical picture also doesn't look favorable for airlines, according to Mark Newton, founder and president of Newton Advisors.
"I don't like the airlines here, I think they're rather unattractive," Newton said during the same interview. "We've seen a rather robust move off of lows last spring — airlines [the XAL airline index] — went from prices right near $33 up to nearly $90. Now you're seeing some evidence of transportation actually rolling over in the last couple weeks."
The JETS ETF is flat for the year, lagging the 2% gain for the S&P 500. The IYT transports ETF, 10% of which is weighted toward airlines, is also flat.
Jumping in now also does not make sense after airlines' strong rally off the lows, Newton said. In fact, airlines have managed to rebound alongside crude oil, rather than suffering from an inverse correlation as the commodity moved higher.
"It's a tough area to bet on, technically, with XAL up near its highs and starting to stall," he said. "We've had a very, very good move off of lows. It's time to take profits in the airlines."