Airlines stocks fall as economic worries overshadow the travel escalation

An American Eagle taxi plane as a Southwest Airlines plane lands at Reagan National Airport in Arlington, Virginia, Jan. 24, 2022.

Joshua Roberts | Reuters

Packed planes. Air travel in the sky. End of covid testing for international arrivals. There is a lot in favor of airlines these days – except for their stock prices.

The recent drop in the sector has overtaken the broad market swoon as investors weigh the chances of a recession and how strong the Federal Reserve will be in curbing the sharp increase in consumer prices since the early 1980s.

American Airlines prices fell nearly 10% on Thursday afternoon, touching the lowest price since November 2020. Southwest Airlines fell nearly 6%, hitting its lowest level in nearly two years. Delta Air Lines and United Airlines both fell 8%, while the NYSE Arca Airline Index, which tracks 18 airlines, is down more than 7%.

On Wednesday, the Federal Reserve raised interest rates by three-quarters of a percentage point, the largest increase since 1994, in an effort to tame inflation.

“If you’ve been on a plane recently, planes are very full and plane tickets are very expensive,” Federal Reserve Chairman Jerome Powell said on Wednesday.

Strong travel demand more than two years after the Covid-19 pandemic has been a boon for airlines, with Delta, United and American recently forecasting a return to profitability. Carriers executives said travelers are absorbing the higher prices.

The supply of airlines has been restricted. Delta, JetBlue Airways, Spirit Airlines, Alaska Airlines and others have cut summer flight plans to give themselves more wiggle room for routine disruptions and in some cases to address labor shortages.

The airline’s chief executives will almost certainly meet with Transportation Secretary Pete Buttigieg late Thursday to discuss how well they are prepared after increasing delays and cancellations this year, according to people familiar with the matter.

There is some indication that the travel spurt could start to cool off, albeit from high levels. Fare-tracking Huber said Wednesday that domestic airfares have fallen for the first time this year, with round-trip fares coming in at $390, down from $410 in mid-May. This is in line with the usual seasonal trends, she said.

US start-up airline Avelo said Thursday it will cut fares by 50% for all 25 destinations “to help ease inflation for people during these turbulent times.”

What will be key for airlines moving forward is demand after the summer travel surge, when business travel usually picks up. Business owners are worried about a recession, and in some cases, the announcement of layoffs may curtail travel plans.

“The market just reacts to anything cyclical, anything considered sensitive to the economy,” said Savanthi Seth, airline equity analyst at Raymond James. “As frustrating as it is to watch stocks because we’re entering this recession like we’ve never been before.”

She pointed to the strong and pent-up demand from the epidemic, the increase in consumer savings, and the accumulation of liquidity with airlines during the epidemic, which means that they will not have to burden their balance sheets with expensive debts.

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