3 Airline Stocks Stuck in a Holding Pattern

3 Airline Stocks Stuck in a Holding Pattern
  • Southwest’s revenues are getting better thanks to pent-up travel demand
  • American Airlines regional subsidiaries announced a 50% pay hike for pilots
  • Delta Air Lines, Inc. returned profitability in the June quarter

Have you ever been stuck on a runway while a mechanical problem is being resolved? And the snack distribution was not generous?

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There are many airline shareholders that can sympathize. Recently, it has been difficult to find growth and dividend payouts.

A myriad of challenges has a once hot reopening play going nowhere fast–and a potential lasting recession threatening to send industry stock prices to pre-Covid levels.

In a (pea)nut shell, the good news is that leisure and business travel demand is back with a vengeance. Unfortunately, fuel prices, wages, debt loads, and wages are all on the rise.

Just when things were looking up for embattled airline stocks, they now face another uphill climb to regain market favor. Here’s how the top-followed companies are handling the latest turmoil.

What Issues is Southwest Airlines Facing?

When your business model is built on low costs and low fares as is the case with Southwest Airlines Co. (NYSE: LUV), an inflationary backdrop isn’t ideal.

On the bright side, Southwest’s revenues are getting better thanks to pent-up travel demand and, lately, bargain hunting for cheaper flights. The $6.7 billion it recorded in Q2 exceeded pre-Covid levels by about 10%.

Although it also beat Street estimates, the market reacted negatively to (among other things) a 5% increase in cost per available seat mile (CASM)–and that excluded fuel expenses, which nearly doubled year-over-year to $3. 36 per gallon. The ongoing war in Ukraine could keep fuel prices elevated for the foreseeable future, a headwind Southwest and its peers can do little about.

Southwest is also dealing with pilot shortages, which is forcing it to spend more on recruitment and training efforts. Southwest is trying to repair ties with its employees in the wake of the pilot protests.

Earlier this month it reached a tentative agreement with an aircraft technicians union, the terms of which haven’t been disclosed. To avoid further flight cancellations and alienating loyal customers, it is important to continue labor negotiations.

Over time, Southwest should benefit from the uptrend in demand along with the things that have historically made it a go-to for many travelers–simple fares and superior customer service. However, the best fare structures won’t matter unless there are signs of an improvement in the cost structure.

What is American Airlines’ Biggest Concern?

American Airlines Group Inc. (NASDAQ: AAL) is also no stranger to higher expenses, which have been the main reason the stock went sideways throughout the summer. It too is grappling with increased fuel prices and pilot salaries that overshadowed a 79% surge in revenue last quarter. Management projected that full-year CASM will be up 10% to 12% with higher labor costs playing a big part.

Just as fuel prices are out of American’s control, so too is the recent wave of pilot retirements that took hold during the pandemic. Like fast-food operators and others who are facing labor shortages, the airliner has had a limited supply of replacements to turn to.

Meanwhile, it has been forced to increase the wages of existing pilots so as to not make labor shortage matters worse. In June, a pair of American Airlines regional subsidiaries announced a 50% pay hike for pilots through August 2024. Recruitment pressures should ease as Piedmont Airlines and Envoy Air pilots are now the highest-paid regional airlines. But will other airlines demand similar raises?

An additional concern with American is that it has a heavier debt burden than most U.S. airliners. Debt accounts for 120% of the company’s capital structure, roughly 1.5x the industry average. Management’s ability to reduce debt is limited, especially in a rising rate environment with few refinancing options. Management is already facing high costs. Even with passenger traffic increasing, leverage will likely be an overhang on stock for some time.

Has Delta Air Lines Stock Bottomed?

Delta Air Lines, Inc. (NYSE: DAL) returned to profitability in the June quarter but the rewards have yet to flow through to shareholders. The stock is trying to claw its way back from June 2022, its worst monthly drop since the Covid-onset. Although the Q2 report was a catalyst for a mini-rally, Delta is still far from being out of the woods.

Unfortunately for Delta bulls, the sharp turnaround to positive earnings came with a gloomier outlook that has limited the stock’s upside. Management adopted a more cautious tone in the third quarter, despite lower capacity and labor shortages.

Demand growth is expected to be minimal in the third quarter, which could put the near-term excitement around profits on hold for longer. Travelers may be cancelling their plans to travel due to economic uncertainty. This is not a good sign heading into the holiday season. Will Americans choose to travel or stay in the country more as gasoline prices rise?

In addition to the widespread caution among airline executives, Wall Street’s less than bullish sentiment around airline stocks has kept the group grounded for much of 2022.

Will they take flight again in 2023? Let’s just say that there will be a lot of work involved.

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