With global mobility back in full swing after more than two years of ensuing restrictions and pandemic lockdowns, airlines have been struggling to keep up with the surging demand, as ticket sales hit shy of pre-pandemic levels.
Q2 2022 hedge fund letters, conferences and more
As the international travel rebound continues well into the tail-end of the summer season, airline operators are battling to keep up with surging consumer demand as labor shortages and pilot strikes wreaked havoc on the industry.
In the United Kingdom, London Heathrow Airport, Europe’s biggest airport by passenger count, announced on July 12 that it will impose a 100,000 daily passenger limit on all departing flights. The decision was originally intended to last until September, but that has recently been extended into 2023.
Over in the United States, some U.S. airlines have already canceled more than 100,000 flights this year, and roughly 30,000 since Memorial Day Weekend CNN reported using data collected by flight tracking site FlightAware.
Canceled and delayed flights aren’t the only thing that has left thousands of passengers feeling frustrated, as global flight schedules from remote destinations as far as Reynisfjara to Hanga Roa have experienced major delays. Thousands of luggage pieces have also ended up on the wrong flights, or completely lost as pandemic-related layoffs, and ground staff shortages are leaving many airports severely understaffed.
Long-haul leisure flights started the year -75% below pre-pandemic levels, but in less than three months, international flight bookings surged just below 2019 figures according to a report published by the Mastercard Economic Institute. The same report revealed that with the full return of travel and leisure, global flight bookings soared by 25% in April, a number last seen before the pandemic that brought the aviation industry to a near standstill.
Though airlines can make up for pandemic-driven losses, will the surge in ticket sales reflect in their performance on the stock market, even as investor sentiment nosedives further over fears of a looming recession?
Cause of Chaos
The havoc passengers have experienced over the last few months is a result of airline operators and airports drastically slashing employee numbers in the early months of the pandemic, as the global health crisis brought the global mobility industry to an abrupt standstill.
In the summer of 2020, EasyJet was one of the first major airlines to shred more than 30% of its workforce, with company CEO, Johan Lundgren claiming numbers will only return to normal by the earliest 2023. Airbus did the same, cutting 15,000 jobs in Europe, stating that numbers will only return to normal as early as 2023 and latest 2025.
In the U.S. furloughs peaked near 30,000 at airlines such as United and American. By the end of the year, the aviation and airline industry already lost more than 90,000 jobs.
As thousands of airline workers across the world were left at the mercy of corporate buyouts, some looking to enter new industries altogether, market conditions slowly started crumbling, lasting well into 2022.
Job cuts were among several money-saving tactics airlines used to offset losses experienced during the pandemic. As travel slowly made a return during the later part of 2020 and 2021, airlines were already seeing red, unable to retain workers as many were reluctant to return.
The cost-saving cuts would help some outlive the brutal financial turmoil in the early months of the pandemic, but this would later result in complete havoc across the world, as the industry experienced a surge in consumer demand, even as ticket prices climbed due to rising inflation and fuel costs.
Though some airlines were able to surpass their quarterly revenue projections, with some even raising Q2 estimates, choppy stock market conditions coupled with aggressive rate hikes and geopolitical tension would leave some investors feeling apprehensive over any potential gain or growth in airline stocks.
The Winners
While several airline operators are looking to still raise revenue projections for the rest of the year, fear over the looming recession could mean a sudden drop in consumer spending, and investors looking to recession-proof their portfolios.
A handful of airlines have given some guidance on how they look to ride out the coming months as the economic downturn persists, yet not all are currently sharing the same sentiment.
Southwest Airlines
The low-fare airline has given some insight as to how it will raise its Q3 earnings, but this has left some investors questioning whether this move could ultimately impact company growth and stock performance.
Despite deciding to remove expiration dates from all credits later in the year, Southwest (NYSE:LUV) saw revenue jump by 139% compared to Q2 2019. At 6.7% less capacity, overall unit revenue was up 22%, while earnings per share (EPS) was down slightly from $1.37 to $1.30, beating estimates of $1.18 per share.
Even as the airline experiences pilot and ground staff shortages, delays in aircraft deliveries from Airbus, and having to raise non-fuel unit cost inflation from 12% to 15%, share prices are still well-priced under $40.00 per share.
Alaska Airlines
Executives at Alaska Airlines (NYSE:ALK) have been working to swiftly move the company towards a more cost-effective operating strategy that would see the airline implement a single-type fleet. A single-fleet type would significantly bring down maintenance costs and cash required to train new pilots.
Alaska Airlines was able to strongly rebound from the pandemic, even well before short and long-haul departures started trending upwards. At the height of the pandemic in 2020, the company was able to lower its dependency on cash, become cash-flow positive, and see profitable margins.
Year-to-date performance is slightly down by roughly 13%, but its price-to-earnings ratio (P/E) is sitting comfortably at 28.99, as share prices are moving towards the $50.00, still below the high of $65.43 of February 21, 2020, a time where the U.S. was still at the early stages of the coronavirus pandemic.
All-in-all, Alaska has a promising growth strategy up its sleeves and looks to hold out strong in the coming days, even as fuel and inflation-driven costs see the airline increasing ticket prices.
Delta Airlines
Delta (NYSE:DAL) have experienced some major disruptions to its operations these last few months and have canceled more than 3,000 flights since Memorial Day, resulting in 4% of operating flights.
Despite the high number of cancellations and delays, Delta had a strong Q2 earnings report, seeing revenue grow by 10% to $13.8 billion. In the coming months, the company has mentioned that Q3 revenue growth will fall anywhere between 1% to 5%, substantially lower than 2019 levels of 15% to 17%.
Even though Delta experienced positive revenue growth, adjusted EPS was still lower than expected at $1.44 mainly due to mass disruptions in flight operations and severe staff shortages.
Looking forward, Delta did mention to shareholders that it’s still looking to meet its goals for EPS above $7 and free cash flow of $4 billion by 2024. With clear and positive guidance, investors are hopeful that Delta will meet its goals, even as turbulent market conditions persist.
The Losers
United Airlines
United Airlines (NASDAQ:UAL) had some robust performance but was still able to grow its revenue by 6.3% from Q2 2019, and the company is positive that with strong consumer demand, revenue for Q3 could be 11% higher for the same period in 2019. However the positive earnings performance, Q2 2022 marked the first profitable quarter for the airline without federal aid.
UAL stocks currently still hold a strong ‘buy’ rating, but many investors are still wary of the company's potential growth expectations for the months ahead. In its earnings call, the company mentioned that it’s looking for a growth increase of no more than 8%, substantially lower than the 20% initially forecasted.
Stock performance has remained steady, with share prices hovering closer to $40.00 per share, but year-to-date performance has come down roughly 15.08%.
Strong demand, coupled with higher operating costs and severe labor shortages have seen the company slow down its growth potential, leaving some investors with less-than-anticipated future guidance.
American Airlines
Before the onset of the pandemic, American Airlines (NASDAQ:AAL) were perhaps already entering turbulent conditions, as stock prices have tumbled by 56% since 2018. The downturn of the pandemic hit the company even harder than many anticipated, with a decrease in sales, a soaring amount of outstanding shares, and its revenue also taking a major hit.
As with other airlines, American saw its full-year revenue drop from $45.8 billion in 2019, to $17.3 billion in 2020. By the end of 2021, the full-year revenue was up to $30 billion, and in its latest earnings report revenue was heading closer to the $40 billion mark.
On the stock market, share prices are still down more than 21.49% year-to-date, with average prices hovering in the near $15.00 per share range.
Although it might seem doom and gloom for AAL, there are some positives to their situation, with adjusted EPS at $0.76, up from Q1 2022. Quarterly revenue has also climbed from $8.90 billion in Q1 2022 to $13.42 billion in Q2 2022.
When looking forward, American Airlines will need to make adjustments to its current operations strategy if it’s looking to steer clear of any uncertain economic downturns experienced in the market. Additionally, the company will need to make further considerations if it’s looking to see its share prices reach the $32.00 per share mark of 2018.
The Bottom Line
As airline operators are looking to steer towards a full rebound to pre-pandemic levels, as travel and leisure take off again, market conditions have and remain challenging for a handful of operators unable to shake off pandemic-induced losses.
Airlines have not only been battling major headwinds throughout the last two years, having to make major cutbacks resulting in thousands of job losses. Now, as travel takes new flights, airlines are struggling to keep up with the soaring demand, inflationary conditions, labor shortages, geopolitical tension, and rising fuel prices.
The bottom line is that for investors looking to buy and hold, airline stocks could make a full rebound to levels seen before the pandemic if the Fed can get inflation under control and steer clear of a recession. There’s a lot to consider with airline stocks, but for the most part, they have shown some resilience, while others were able to bounce back completely.
The long-term outlook could mean that investors will be able to make substantial gains from airline stocks, as prices are reasonable, and earnings have been growing. It's only a matter of how much uncertainty the market can handle at this point, and for how long.
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