Airline stocks lose their year-to-date gains as industry ‘divergence’ emerges

Airline stocks are experiencing turbulence amidst challenging times.

US carriers like American Airlines (AAL), United (UAL), and JetBlue (JBLU) are struggling in the fourth quarter after losing their gains from the first half of the year. They were soaring high during the “revenge travel” period. Even Delta (DAL), the only major airline with positive performance this year, has come down from its summer peak.

Interestingly, among these airlines, US carriers offering international routes are performing better than their domestic counterparts.

“The tide has shifted,” explained Chris Raite, sector analyst at Third Bridge, in an interview with Yahoo Finance. “We are seeing a divergence. International travel is more profitable, giving them a competitive edge.”

The US Global Jets ETF (JETS), which tracks a range of airline operators and manufacturers, has declined by 30% over the past three months, wiping out the almost 30% rally it experienced in the first half of the year.

The industry faces uncertainty due to ongoing labor negotiations and rising jet fuel costs. United stock plummeted by 9% on Thursday after the major carrier cut its forecast, citing flight disruptions to Tel Aviv amid the Israel-Hamas war and higher fuel costs.

“Fuel prices remain volatile and worked against us in the quarter. Our average fuel price for the quarter was $0.30 higher than our July projection, accounting for the reduced outlook,” explained Michael Leskinen, chief financial officer of United, during the company’s earnings call.

The increase in jet fuel costs was not unexpected, as air carriers had previously warned about its impact on their financial results.

Delta CEO Ed Bastian mentioned during the carrier’s earnings call in October that “since raising our full-year guidance over the summer, our revenue outlook has improved, though higher fuel and maintenance costs have affected our earnings and cash flow.”

American’s stock rebounded from a three-month low after the carrier’s profit exceeded Wall Street expectations, but its forecast was affected by higher fuel costs and demand trends.

While all carriers face higher costs, low-cost domestic carriers seem to be taking the hardest hit.

A year-to-date chart reveals that Frontier (ULCC), Mesa Air (MESA), JetBlue, Southwest (LUV), Alaska Air (ALK), and Spirit (SAVE) have all experienced double-digit percentage declines. Most of them reached their peak around mid-July and have been on a downward trend since then.

On the other hand, American is down by 8%, United by 2%, and Delta is up by nearly 2%.

The relative performance among carriers is influenced by traveler trends. Domestic travelers took shorter trips during the pandemic in 2021 and 2022. However, strong demand for international flights is now benefiting international carriers but posing a challenge to lower-cost US operators.

“The international carriers are using their profitability from international travel to compete more aggressively and regain domestic market share lost during the pandemic in recent years,” emphasized Chris Raite from Third Bridge, which is a view also expressed by major carriers this week.

For instance, United announced plans to increase the capacity of its domestic flights.

“United has significantly increased its domestic capacity compared to other airlines since 2019, and we plan to further expand in the coming years,” stated Andrew Nocella, United’s chief commercial officer, during the earnings call.

American CEO Robert Isom also expressed their intention to restore regional service in smaller US markets during the company’s most recent earnings call.

Furthermore, the pilot shortage seems to affect low-cost domestic carriers more than larger flight operators.

“The network carriers are the big winners in the pilot shortage. They can offer higher salaries than low-cost carriers and operate larger aircraft, making them attractive to pilots,” explained Raite.

Despite the challenges, airline executives have not indicated that they are anticipating a recession at this point.

“Based on the reconfiguration of cabins, it doesn’t seem that the carriers are predicting a recession. The way they are spending their money signals their confidence,” Raite added.

For example, United plans to increase its first-class seating capacity by 80% from 2019 to 2027.

“All of the major US airlines have reconfigured their cabins to cater to affluent consumers. We are seeing robust growth from this demographic, which indicates their optimism about the future,” emphasized Raite.

Even if international travel faces challenges, major US carriers like United, American, Delta, and Southwest are better positioned to navigate uncertainties compared to low-cost carriers, according to Mike Boyd, president of Boyd Group International, an aviation consulting firm.

“The current conditions may be rougher than originally anticipated, but the major airlines in America, including Southwest, are well-prepared to weather turbulence in the next six to eight months,” stated

Reference