Have you ever been stuck on the runway while a mechanical issue is resolved (and the snack distribution is less than generous)?
MarketBeat.com - MarketBeat Many airline shareholders can relate. Growth and dividends have been hard to come by recently.
There are a number of challenges that have a once hot reopening play going nowhere fast.
Leisure and business travel demand is back with a vengeance. Fuel prices, wages, and debt loads are all going up.
When things were looking up for airline stocks, they now face an uphill climb. The latest turbulence is being handled by some of the most popular companies.
Southwest Airlines Co. is a good example of a business model built on low costs and low fares.
The good news is that Southwest's revenues are getting better thanks to increased travel demand. Pre-covid levels were about 10% higher in the second quarter.
The market reacted negatively to a 5% increase in cost per available seat mile, and that excluded fuel expenses, which nearly doubled year-over-year. Southwest and its peers can't do much about the war in Ukraine keeping fuel prices elevated.
Southwest is spending more on recruiting and training due to pilot shortages. Southwest is trying to repair relations with employees after this summer's pilot protests.
The terms of the tentative agreement have not been disclosed. Continued progress with labor negotiations is needed to prevent further flight cancelations.
Southwest should benefit from the rise in demand along with the things that have historically made it a go-to for travelers, such as simple fares and excellent customer service. Even the best fare structures won't matter until the cost structure improves.
The main reason the stock went sideways throughout the summer was due to higher expenses. The surge in revenue was overshadowed by increased fuel prices and pilot salaries. The management projected a 10% to 12% increase in the full-year CASM.
The recent wave of pilot retirements that took hold during the Pandemic is similar to fuel prices in American. Fast-food operators and others who are facing labor shortages have a limited supply of replacements to turn to.
It was forced to increase the wages of existing pilots so that labor shortage wouldn't be worse. A 50% pay hike for pilots was announced in June by two American Airlines regional subsidiaries. Piedmont Airlines and Envoy Air pilots are the highest paid among regional airlines.
American has a higher debt burden than most US airliners. The company's debt is 1.5 times the industry average. Management's ability to reduce debt is limited due to high costs and a rising rate environment. With passenger traffic on the rise, leverage is likely to be an overhang on the stock for a while.
The rewards have yet to flow through to the shareholders of Delta Air Lines, Inc. June was the worst month for the stock since the Covid-onset. Delta is not out of the woods despite the Q2 report.
The gloomier outlook has limited the stock's upside after the sharp turn to positive earnings. Management struck a more cautious tone due to labor shortages.
There will be little demand growth in the third quarter, which will put the excitement around profits on hold. Travelers may be suspending travel plans due to economic uncertainty. Heading into the holiday travel season, that isn't a good sign. Will more Americans go on road trips and stay in their homes now that gasoline prices are less expensive?
Wall Street's less than bullish sentiment around airline stocks has kept the group grounded for much of the year.
Are they going to take flight again in a few years? A lot needs to go right.
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