It is a well-documented fact that the stronger-than-expected bounce back of air travel has served as a huge boon for airline stocks. With passenger revenues accounting for most of the top line, airline revenues are moving northwards in the post-COVID-19 scenario.
Air travel demand is not only strong on the leisure front (pent-up demand for international travel is the most vital driver of leisure travel), but what is more encouraging is that business travel is coming back as pandemic-related restrictions are removed. Despite the bullish scenario concerning the top line, the Zacks
Airline industry has shed 7.1% of its value in a month’s time, against the S&P 500's 0.4% uptick. Image Source: Zacks Investment Research
Let’s delve deep to unearth the reasons behind the disappointing price performance despite the bright top-line scenario.
The northward movement in oil prices is not a welcome development for airline stocks. This is because expenses on fuel represent a significant input cost for airlines. Therefore, an increase in fuel costs hurts bottom-line growth. Recently, oil prices crossed the $90-per-barrel mark for the first time since November. The northward movement in crude price is primarily due to the extension of production cut by Saudi Arabia and Russia through the end of the current year.
The sharp rise in one of the primary input costs of airlines is likely to hurt the bottom-line growth of the stocks in the third quarter of 2023. The development has caused key airline stocks, including the likes of
American Airlines ( AAL Quick Quote AAL - Free Report) , Delta Air Lines ( DAL Quick Quote DAL - Free Report) , United Airlines ( UAL Quick Quote UAL - Free Report) and Spirit Airlines ( SAVE Quick Quote SAVE - Free Report) , to increase their September quarter projections for fuel price per gallon.
American Airlines’ management stated that “fuel prices have increased considerably since the company’s initial third-quarter guidance issued on Jul 20, 2023”. American Airlines now expects the fuel cost per gallon (including taxes) in the $2.90-$3.00 band (the earlier guidance was in the $2.55-$2.65 range). DAL now expects fuel price per gallon in the $2.75 - $2.90 range (earlier guidance: $2.50 - $2.70).
Spirit Airlines’ management now expects third-quarter fuel cost per gallon to be $3.06, against the earlier projection of $2.80. United Airlines now expects the fuel cost per gallon in the $2.95-$3.05 band (the earlier guidance was in the $2.5-$2.8 range).
As if high fuel costs were not enough, labor costs also increase courtesy of the multiple labor deals witnessed in the space. Given the high air-travel demand and the labor crunch in the post-COVID-19 scenario, the bargaining power of various labor groups has increased.
Another headwind has emanated from the devastation caused by wildfire to the Lahaina town in West Maui. This has affected
Hawaiian Holdings ( HA Quick Quote HA - Free Report) , currently carrying a Zacks Rank #3 (Hold), the most.
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the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Due to the reduced travel demand to Maui from the U.S. Mainland and Neighbor Islands, HA now
expects third-quarter 2023 total revenues per available seat miles to decrease 4-7% from third-quarter 2022 levels (prior projection: 2-5% decline). What’s Ahead for Airlines?
With people again taking to the skies, passenger revenues are likely to remain strong. However, costs are likely to stay high, in turn hurting the bottom-line growth of airlines.
The International Energy Agency recently said that the actions of Saudi Arabia and Russia will lead to a supply deficit through the December quarter. This implies that oil prices will remain high, which is a bane for airlines’ bottom lines. We expect pay-related deals with labor groups to continue, at least in the near term. Consequently, high labor costs are also likely to eat into profitability.