- Investors in airlines are concerned about demand, but United’s updated forecast indicates there is nothing to worry about.
- Despite higher gasoline expenses, United is confident that it will meet its previous margin target owing to solid pricing power.
- There is still a lot of uncertainty going into the fall, but the summer travel season will be quite robust.
What’s going on with airline stocks
United Airlines Holdings (NASDAQ:UAL) increased its outlook for the current quarter, and as a result, airline stocks are soaring. United and JetBlue Airways (NASDAQ:JBLU) were trading up as much as 7% by midday Tuesday, and Hawaiian Holdings (NASDAQ:HA) was up by 9.5%. In addition, shares of American Airlines Group (NASDAQ:AAL), Delta Air Lines (NYSE:DAL), Alaska Air Group (NYSE:ALK), and Brazilian airline Azul (NYSE:AZUL) were all up by at least 5%.
Why we care
Investors in airline companies are on eggshells as they wait to see whether high fuel costs, inflation, and other factors will dampen what they expect to be a bumper summer travel season. The airlines had targeted 2022 as a deadline to recoup some of the costs from 2020. That was when the pandemic significantly reduced travel demand and forced carriers to borrow money to stay aloft.
United Airlines provided a shot in the arm to the industry on an after-hours Monday regulatory filing. According to reports, the airline raised its passenger revenue projection owing to a strong demand climate. As a result, United expects total revenue per available seat mile, a standard industry measure, to increase. They are predicting gains from 23% to 25% compared to the same pre-pandemic period. In comparison to United’s previous prediction of up 17%.
United also said it is raising its capacity outlook slightly and that it expects costs to be more than previously anticipated, owing to higher oil prices. However, the overall message is that ticket demand has remained steady, giving the airline industry pricing power. United kept its adjusted operating margin forecast at 10%, showing that it has been able to compensate for rising fuel costs with increased ticket prices. United stated:
“In the period following the company’s previous guidance, the demand environment has continued to improve, resulting in a higher unit revenue outlook for the second quarter 2022 … The price of oil has also continued to increase, resulting in a higher expected fuel price for the second quarter 2022.”
Although the advice is specific to each firm, applying what United said to the broader industry isn’t difficult. For example, despite all of the talk about how inflation will affect consumer confidence, there has been no indication that vacation plans have changed.
Now, the real issue is what will happen to demand once the summer is over. Businesses are gradually resuming, and when they do, it’ll likely result in a boost in corporate travel. However, the industry still anticipates international and business demand to lag domestic for the next year or more. Thus limiting revenue growth for airlines.
The good news is that a strong summer season should provide the airlines with the financial wherewithal to withstand any new headwinds. Whether those headwinds come in the form of a new wave of the pandemic or a recession. The bad news is, despite all the uncertainty, there are likely limits to how high this sector can go. Delta and Southwest Airlines (NYSE:LUV) are excellent long-term options for investors looking for stability.
On a day when the markets are up, and investors are hoping for the best, airlines are reporting strong earnings. There is no reason to believe that the turmoil has ended for good, given how the previous years have gone. However, for now, airline stocks are soaring.