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Is this stock a bargain or a falling knife to avoid after a 10% slump?

Do you have a least favourite stock market segment? For me, it has to be airlines and travel companies, closely followed by oil explorers, though I confess to some affinity with the latter.

The big problem with airlines is they have pretty much no control over the factors that determine their business — costs, competitiveness and other outside influences. The failure of Iceland’s Wow Air adds to the list of recent collapses.

When you book a flight to go on holiday, what do you look for? For me, it’s cost. And only if there are options with very similar prices will I consider other things like comfort, duration, transit facilities, etc.

I mean, despite being rated as the worst airline for the sixth consecutive year by Which?, Ryanair still gets most of its planes mostly full. Because it’s cheap.

737 Max grounding

Shares in TUI Travel (LSE: TUI) took a 10% hit Friday morning when it told us it now expects to see €200m (£173m) knocked off its profits this year after the grounding of Boeing’s 737 Max fleet. Instead of the previously “broadly flat” earnings outlook, the company is now expected to record a 17% EBITA fall.

The planes have been stopped from flying after their fancy stall-prevention system has been implicated in crashes of Lion Air and Ethiopian Airlines flights, and TUI’s estimated costs are based on a return to service no later than mid-July. If that doesn’t happen, EBITA could fall by as much as 26%.

This morning’s share price dip accelerated the fall that’s been going on for the past year, with TUI shares now down 35% since their May 2018 peak.

5-year slump

Even big favourite easyJet (LSE: EZJ) has been suffering since the oil price has been rising and Brexit fears are reining in holidaymakers’ spending.

Again, we’ve seen a share price fall since last summer. But even looking back over the past five years, we still see a fall of 40%. That’s ameliorated somewhat by easyJet’s dividend, which has been yielding around 5%, but it’s still a weak overall performance.

Even the lacklustre FTSE 100 as a whole has gained 8% over five years, and total dividend yields for the index are expected to edge up to 4.9% this year.

And easyJet is one of the best. Even after an expected drop, of two percentage points, the company’s load factor for the quarter to 31 December still came in at 89.7%, with an increase in capacity leading to a 15% rise in passenger numbers.

Good companies, but…

That shows how close to the edge the industry is operating. Percentage load factors in the mid-90s are pretty much expected these days, which leaves almost no room for the fluctuations that simply will happen for reasons outside of airlines’ control.

I see TUI and easyJet both as well-managed companies with decent levels of customer satisfaction. But when the best in the business are suffering and there’s nothing they can do about it, I see that as a sign of a sector to avoid.

I think you can make money investing in airlines if you can buy in the dips and take profit when the price is high, but I severely lack the needed timing skills.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.