- Southwest’s revenues are improving thanks to pent-up travel demand
- American Airlines Regional Affiliates Announce 50% Pilot Pay Increase
- Delta Air Lines, Inc. returned to profitability in the June quarter
Have you ever been stuck on the runway with a mechanical problem solved (and the snack distribution is less than generous)?
There are many airline shareholders that can sympathize. Lately it has been difficult to get the growth and dividend payments.
A myriad of challenges features a once-hot reopening game that isn’t going anywhere fast – and a potentially lasting one recession threatens to send stock prices in the sector to pre-Covid levels.
In short, the good news is that the demand for leisure and business travel is back. The bad news is that fuel prices, wages and debt have also risen significantly.
Just as things were going up for the embattled airline stocks, they now face another tough climb to win back the favor of the market. Here’s how some of the most followed companies are coping with the latest turbulence.
What problems does Southwest Airlines face?
When your business model is based on low costs and low rates, as is the case with Southwest Airlines Co. (NYSE: LUV)an inflationary background is not ideal.
On the bright side, Southwest’s revenues are improving thanks to pent-up demand for travel and, lately, bargain hunting for cheaper flights. The $6.7 billion it registered in the second quarter exceeded pre-Covid levels by about 10%.
While it also beat Street’s estimates, the market reacted negatively to (among other things) a 5% increase in the cost per available seat mile (CASM) — and that didn’t include fuel costs, which nearly doubled year-over-year to $3. .36 a gallon. The ongoing war in Ukraine could keep fuel prices high for the foreseeable future headwind Southwest and its ilk can do little about it.
Southwest is also struggling with pilot shortages, forcing it to spend more on recruiting and training efforts. In the wake of this summer’s pilot protests, Southwest is trying to reconnect with workers over pay and working conditions.
Earlier this month, it reached a preliminary agreement with an aircraft technicians’ union, the terms of which have not been disclosed. Continued progress with labor negotiations is a must to avoid further flight cancellations and alienation of a loyal customer base.
Over time, Southwest should benefit from rising demand and the things that have historically made it a favorite for many travelers: simple fares and superior customer service. However, as long as there are no signs of the fee structure improving, even the best fee structures will matter little.
What is American Airlines’ biggest concern?
American Airlines Group Inc. (NASDAQ: AAL) is also no stranger to higher costs, which were the main reason stocks went sideways over the summer. It is also struggling with higher fuel prices and pilot salaries that overshadowed a 79% increase in revenue in the past quarter. Management forecast that CASM will grow by 10% to 12% for the full year, with higher labor costs playing a major role.
Just as fuel prices are beyond America’s control, so is the recent wave of pilot retirement that occurred during the pandemic. Like fast food operators and others dealing with labor shortages, the aircraft has had a limited supply of replacements.
Meanwhile, it is necessary to increase the wages of existing pilots in order not to make the labor shortage worse. In June, a pair of American Airlines regional subsidiaries announced a 50% pay increase for pilots through August 2024. With Piedmont Airlines and Envoy Air pilots now the highest paid among the regional airlines, hiring pressure should ease, but others will be similar. demand raises?
An additional concern with American is that it is more heavily indebted than most US aircraft. Debt accounts for 120% of the company’s capital structure, approximately 1.5x the industry average. Management is already being challenged by high costs, but management’s ability to reduce debt is limited, especially in a rising interest rate environment where refinancing options aren’t great. Even with passenger traffic booming, leverage is likely to be an overhang on the stock for a while.
Delta Air Lines, Inc. (NYSE: DAL) returned to profitability in the June quarter, but the rewards have yet to flow to shareholders. The stock is trying to work its way back from June 2022, its worst monthly decline since the onset of Covid. The Q2 report helped spark a mini rally, but Delta is far from out of the woods.
Unfortunately for Delta Bulls, the sharp turn to positive gains has been accompanied by a bleak outlook that has limited the stock’s upside potential. Amid reduced capacity and labor shortages, management took a more cautious stance than in previous quarters.
Demand growth is expected to be minimal in the third quarter, which could put off the near-term earnings excitement for longer. With the industry’s capacity limited and ticket prices steadily increasing, travelers may suspend travel plans as economic uncertainty looms. That doesn’t bode well for the all-important holiday travel season. Now that gas prices are more bearable, will more Americans opt for road trips and staycations?
In addition to widespread caution among airline executives, Wall Street’s less-than-optimistic sentiment is round airline shares has kept the group grounded for much of 2022.
Will they fly again in 2023? Let’s just say there’s a lot to go right.