The first company in the sector to release third-quarter earnings last week, Delta Air Lines Inc., lowered its forecast for 2023 profits because of rising expenses and declining prices following the epidemic.
Rivals United Airlines Holdings Inc., American Airlines Group Inc., and Alaska Air Group Inc. issued a barrage of identical warnings after that.
Given that the airline industry is highly vulnerable to the dangers of rising oil costs and a probable slowdown in consumer spending, the deteriorating outlook hastened the selloff of airline stocks. Due to this, the S&P index including five of the largest US airlines down 5.9% last week, bringing the total number of losses to seven weeks, the longest losing run since July 2021.
The demand rebound appears to be tapering off, which puts a lot of pressure on airlines, according to Bloomberg Intelligence analyst George Ferguson. “And things will get worse if fuel prices rise as a result of the Middle East’s problems.”
Friday saw Brent crude surpass $93 a barrel before retreating due to worries that the violence between Israel and Hamas would spread to other parts of the region.
Labour expenses are also going up. The pilots at United just accepted a new contract that provides the highest pay increases at any US carrier, up to 40% over the course of four years. Similar agreements have been reached by American and Delta.
The fact that Americans are withdrawing their surplus funds from banks during the pandemic lockdown is making the situation worse and will likely reduce consumer spending. This is made worse by the possibility that the Federal Reserve will maintain high interest rates as well as the expiration of the government respite on student loan payments for college.
However, some investors appear to be looking to purchase the recent declines.
Despite closing Friday’s trading at a 52-week low, the $1.4 billion US Global Jets exchange-traded fund is expected to report its first monthly inflow in 17 months after earning more than $104 million in October. Large amounts of call options, which profit when the stock price increases, were exchanged in American and United Airlines on Wednesday.
Nevertheless, airlines need to figure out how to maintain their profitability in the face of a significantly higher cost base and a flagging post-pandemic travel resurgence.
Susquehanna analyst Christopher Stathoulopoulos said in a letter to clients that, with just low-cost airlines left to report, “we look for colour on FY23 exit rates for CASM-ex [cost per available seat mile], with ‘cost convergence’ continuing to shape the investment narrative.”