US airline stocks hit 2022 high as United’s results drive rally
A RECORD breaking summer travel season failed to get investors excited about airlines, but an encouraging start to earnings, along with plans to dial back domestic capacity growth to more closely match demand, is brightening the outlook for the sector.
The S&P Supercomposite Airlines Index is trading at highs unseen since May 2022, ending on Friday (Oct 18) with its largest weekly gain since January of last year. The nine-member gauge has even outperformed the broader market rally so far this year, with its 32 per cent jump outpacing the S&P 500’s 23 per cent advance.
The bulk of the recent rally is owed to United Airlines Holdings, which makes up nearly a fourth of the airlines index. The Chicago, Illinois-based carrier reported third-quarter profit on Tuesday that came in above Wall Street’s expectations and announced a new US$1.5 billion buyback program, stoking confidence in its long-term outlook and lifting the shares of industry peers. The stock has risen for seven straight sessions, the longest streak since June 2023.
“This may have legs,” Evercore ISI analyst Duane Pfennigwerth wrote about United Airlines’ rally in an Oct 16 note.
Investors have more appetite for stocks such as airlines that can benefit from a gradually improving US economy that does not experience a recessionary shock that some had earlier feared, he wrote. The sector has been attracting “new faces” among shareholders, but still remains “broadly under-owned”, suggesting there’s room for further gains, according to Pfennigwerth.
Carriers faced a glut of empty seats over the summer that left many scrambling to cut ticket prices and curtail unprofitable routes. Now, the industry is in a better position to boost prices and expand profit margins.
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Growing optimism about the US economy and a broadening market rally have contributed to the strength in the group. At the same time, the price of oil dipped below US$70 a barrel over the past month, easing one of the industry’s most significant cost concerns.
There is still some ground to make up, with the airlines index about 30 per cent away from a post-Covid high it set in March 2021. Delta Air Lines, an industry bellwether and the first major US carrier to report earnings, reported profit and sales guidance last week that fell short of expectations. Nonetheless, president Glen Hauenstein said the demand environment around the holidays and heading into 2025 remains healthy.
There is also uncertainty surrounding the low-cost cohort as premium carriers flaunt basic economy seats to lure flyers away from deep-fare discounters such as Spirit Airlines and Frontier Group Holdings. Bloomberg Intelligence senior analyst George Ferguson said he expects the remaining US airlines that are left to report results to detail more revenue pressures due to a reliance on value-seeking travellers.
“The market may have seen the best two US airline reports of the season with Delta and United, now things get more difficult,” said Ferguson. “I would note that fuel is much lower going into Q4 than it was a year ago, so that’s a nice tailwind which will really help earnings if it persists.”
Earnings for the group continue next week with American Airlines Group set to report on Thursday, followed by JetBlue Airways on Oct 29. BLOOMBERG
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