- Rising fuel costs threaten airlines’ efforts to return to profitability
- Many carriers are responding to this challenge by reducing seat capacity and increasing ticket prices
- Airline stocks do not make a compelling investment case in the current uncertain macro environment
As U.S. airlines begin reporting their first quarter results this week, investors will be keen to know whether the surge in demand for leisure travel after the pandemic-induced crisis has been enough to improve profitability.
As air travel began to rebound after the rapid spread of the Omicron variant last winter, rising fuel costs and recession risks have clouded the sector’s growth prospects. Over the past three months, the US Global Jets ETF (NYSE:) has lost nearly 7%, reversing gains made earlier this year. It closed Monday at $20.39.
Amid growing global energy constraints from Russia’s invasion of Ukraine, airlines now expect jet fuel to be between $2.80 and $3 a gallon this quarter, up from estimates. previous about $2.50. Jet fuel accounts for approximately 20-25% of airlines’ annual operating expenses.
These figures could potentially derail most airlines’ efforts to return to profitability after travel collapsed during the coronavirus pandemic.
However, some airlines remain optimistic. Their short-term weapon is to reduce seat capacity, thereby increasing ticket prices.
Several of the biggest carriers, including United Airlines (NASDAQ:) and American Airlines (NASDAQ:), cut their capacity forecasts for the first quarter, while Delta Airlines (NYSE:) maintained growth in the low end of a year. previous range, according to their regulatory filings. These airlines have also raised their revenue expectations, citing increased travel demand due to declining coronavirus infections.
While airlines could increase fares by reducing the number of seats available, they must be very careful as consumers face threats, now at the highest level in 40 years.
MKM Partners, in a recent report, said:
“We don’t expect airlines to significantly reduce capacity, so expect adjustments not cuts, which ultimately means fuel is unlikely to be higher with the price.”
The encouraging trends in air traffic cannot hide that airline stocks have been a bad investment for several years now. For example, the JETS ETF has lost more than a quarter of its value over the past five years, when it has almost doubled.
Moreover, even if leisure traffic continues to rebound, the business travel segment, the most profitable segment for airlines, is unlikely to return to pre-COVID levels anytime soon.
Analysts are not enthusiastic about airline stocks. Bank of America said travel demand is expected to outpace supply, especially during peak leisure periods. Yet this will not create enough pricing power for airlines to offset higher fuel costs.
Delta to report a loss
On Wednesday, analysts expect Delta Airlines to report a loss per share of $1.33, about half of what it was a year ago. Sales are expected to climb to $8.74 billion, more than double the same period in 2021. The stock closed Monday at $38.21.
American Airlines, which reports earnings on Thursday, April 21, could also see its decline to $2.44 as its sales climb to $8.63 billion, according to consensus analyst forecasts. AAL closed Monday at $16.97.
The next stage of airline growth, which will depend on business travel, still holds many uncertainties, including geopolitical conflicts and risks to global growth amid higher interest rates. Moreover, companies are unlikely to resume worker travel when inflation rises and managers seek to cut costs.