Travelers wait to offload their flight at Portland International Airport. Staffing shortages, the Covid-19 pandemic and other issues have led to historic levels of disruptions in US air travel.
Nathan Howard/Getty Images
Text size
This should be a golden age for airlines like
United Airlines
and
American Airlines
.
Travel is surging and seats are hard to come by.
But airline stocks are painting a different picture, trading down with prices closer to their 52-week lows. United Airlines (ticker:
UAL
) was losing 9% on Thursday, while
Delta Air Lines
(
DAL
) dropped 3.4% and
American Airlines
(
AAL
) fell 7.7%. The
US Global Jets ETF
(JETS) was 3% lower on Thursday.
Demand wasn’t the problem in the second quarter. The summer opened a floodgate of pent-up demand for travel, with the Transportation Security Administration reporting passenger volumes similar to pre-pandemic levels. Over the July 4th weekend alone, the TSA screened more than 11.3 million travelers, the agency said. All three major US airlines either met or beat revenue expectations for the quarter, with American reporting record sales.
But airlines have struggled to keep up with the influx of passengers. The summer has been rife with flight cancellations and delays, brought about by ongoing labor constraints, rising costs, and delays in new plane production. As a result, airlines have been gradually trimming their flight schedules. Both United and American reduced their growth plans for capacity, while other airlines, including
Alaska Air
(
ALK
) and
Air Canada
(
ACDVF
), preliminarily have canceled routes.
One of the key issues is an ongoing pilot shortage. On Thursday, American said it was aiming to aggressively hire pilots by boosting pay and bonuses in a bid to lure them away from regional airlines and other competitors. Analysts expressed concerns that the strategy would add pressure on earnings.
These challenges won’t dissipate anytime soon, according to analysts. Compared to 2019 levels, experts at Third Bridge, a research consultancy firm, expect labor and fuel costs to rise by 29% during the second half of 2022, and to persist in 2023.
Airlines have been successful thus far at passing costs along to passengers, boosting top lines and offsetting some bottom-line pain. It’s less clear that they will be able to do so as the economy slows down and consumers curb their spending.
“Some of the operational pressures will ease late in Q3 as seasonal travel wanes, allowing American and the industry to catch up on hiring, training, and planning,” wrote Peter McNally, global sector lead at Third Bridge. “However, revenues will cool as well, and Third Bridge experts have concerns that come the autumn, momentum on higher fares (that has driven the airlines back to profitability) will cool off.”
US demand trends outside of holiday periods peaked in mid-April, and are down slightly compared to late June levels, wrote Raymond James analyst Savanthi Syth. Fares have also started to decline, with average leisure fares, or fares for flights four weeks out, down 4.3% from average prices in June, she added.
Weakening demand wouldn’t just affect airlines, but rather spread across the tourism industry. Online travel agencies, for instance, would see revenue and profits decline in the near term. That is why Oppenheimer analyst Jed Kelly lowered his full-year revenue estimates for the sector. Kelly is already seeing a deceleration in June and July bookings as the “pent-up demand dynamic wanes,” he added.
Write to Sabrina Escobar at [email protected]