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Is this ASX sector most at risk of profit warnings?

Fasten your seatbelts Fools! The outlook for airline, travel and airport stocks just got decisively darker according to industry experts.

This will have implications for some of our most popular S&P/ASX 200 (Index:^AXJO) (ASX:XJO) stocks such as the Qantas Airways Limited (ASX: QAN) share price, Webjet Limited (ASX: WEB) share price and Sydney Airport Holdings Pty Ltd (ASX: SYD) share price – just to name a few.

The corporate and leisure travel industry is facing multiple headwinds, according to the executive chairman of the Centre for Aviation CAPA, Peter Harbison, reported the Australian Financial Review.

Bad weather ahead for sector

He was giving a speech at an annual conference on Friday where he warned that this is “really, genuinely a watershed moment” for the industry, which is hurt by the falling Australia dollar, declining passenger numbers, high fuel costs and sluggish consumer and business confidence.

We have started to see cracks in the sector with Sydney Airport reporting fewer Aussies going on international trips in its monthly passenger updates, while Virgin Australia Holdings Ltd (ASX: VAH) struggles with rising costs and sluggish demand.

It’s suggested that full-service airlines may have to take a leaf out of the budget airlines playbook and start charging for things they used to provide for free, such as headphones or even putting your cabin luggage in the overhead compartment above your seat.

However, it’s always tricky trying to charge more when customer demand is weakening. I am not sure if this could backfire.

Profit warnings and downgrades to come?

More importantly, one has to wonder if we will see a series of profit warnings coming from travel-linked stocks as this confession season unfolds.

I would have thought that the industry would be the perfect candidate to issue bad news and I don’t think the “Miracle-Morrison” federal election result would do anything for travel as it seems to have done for the housing market.

These are nervous times for Webjet shareholders who are also bracing for potential bad news after its UK partner Thomas Cook run into more trouble, although I think rival Flight Centre Travel Group Ltd (ASX: FLT) won’t be in a much better place.

On the flipside, some believe that the turmoil will throw up select opportunities. For instance, as airlines have been cutting capacity in response to the headwinds, Credit Suisse upgrade Qantas to a “buy” last week as it believes the Flying Kangaroo can take advantage of the retreat of its rivals.

But I think picking winners in this sector is too hard and I prefer to be underweight on stocks leveraged to the local consumer. Instead, I prefer ASX stocks that make most of their revenue from international markets.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited and Sydney Airport Holdings Limited. The Motley Fool Australia has recommended Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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