U.S. Airlines Industry Flying in Grey Skies

The U.S. airlines industry seems to be on cloud nine as traveling demand takes off in the United States. Major airlines in the country are expecting to return to pre-COVID levels soon (probably in the current quarter), while a few have already achieved the same.

Interestingly, the S&P 500 Airlines Industry index increased 15.5% in the past month and has advanced 10.2% year-to-date against a fall of 10.6% last year.

A quick peek into the demand and supply of the U.S. airlines industry will help us understand the ongoing trend better.

Demand Galore

Demand for leisure and business travel and cargo transportation is high in the industry. Relaxation in pandemic-related norms related to vaccinations and wearing of masks, along with a strict take on proper sanitization, have contributed to the momentum.

Digitization of airports activities to make the travel hassle-free, easy means of booking tickets online, advanced airport mechanisms, use of green resources, and digital security services have added new vigor to the industry and been advantageous in increasing footfall.

In addition, airlines are trying to attract travelers with tempting packages, frequent services to hot traveling destinations, and better on-flight and off-flight assistance and services.    

According to the latest United States Department of Transportation (DOT) report, the domestic available seat miles (ASM) are projected to grow 4.5% annually from 2021 to 2041. Also, revenue passenger miles (RPM) are expected to increase 5.7% annually, and enplanements are likely to expand 5.4%.

For the international aviation industry, the federal agency anticipates a 6.1% annual rise in ASM, a 7.5% increase in RPM, and a 6.6% hike in enplanements during the 2021-2041 timeframe.

Supply Conundrums

Airlines’ services were hit hard by the COVID-19 pandemic, as both domestic and international traveling almost stopped. With the economy back on track, U.S. airlines companies are trying to provide safe and improved services at an effective cost.

However, the recent surge in fuel costs, especially after the onset of the Ukraine-Russia war, has hit the industry’s margins and profitability.

According to the U.S. Energy Information Administration (EIA), the spot crude oil prices (WTI) have grown 33.5% in the first quarter of 2022 from the end of 2021 and advanced 7.7% since the beginning of April. Jet fuel costs have surged 77.5% in the first quarter from the 2021 levels and grown 0.3% so far in April.

In its Short-Term Energy Outlook report published in April, the federal agency predicts WTI crude oil prices to increase 29.8% in 2023 from the 2021 base levels, and jet fuel costs are expected to surge 35.69% during the same time period.

In addition to fuel costs, labor problems, stiff competition from peer companies, technical issues in existing aircraft fleets, the requirement to constantly upgrade the fleet, and abiding by the strict governmental norms are some of the key challenges for the industry.

While the industry participants are confident of managing the fuel costs, other concerns have to be cautiously dealt with.

Speedy Recovery on the Cards?

To understand the industry’s health, we have discussed two American airline companies that have released their first quarter 2022 results this week.

United Airlines Holdings, Inc. (NASDAQ: UAL)

The $16.6-billion company has reported weaker-than-expected results for the first quarter of 2022. The quarterly loss per share of $4.24 was above the consensus estimate of a loss of $4.21 per share. Revenues of $7.57 billion came in below analysts’ estimates of $7.68 billion.

Despite the miss, the company’s projections for the second quarter caught investors’ attention. Total revenue per available seat mile (TRASM) in the second quarter is expected to increase 17% over the 2019 levels. United Airlines also expects to generate profits in the quarter, with operating margins of 10%.

The company’s CEO Scott Kirby said, “The demand environment is the strongest it’s been in my 30 years in the industry – and United and its customers will benefit more than any other airline.” He sees the second quarter to be a historic inflection point for the company.

Per the TipRanks Website Traffic tool, visits to the United Airlines site (united.com) increased 17.12% in March 2022 from the previous month. Meanwhile, the footfall on the company’s website has grown 29.82% year-to-date, compared to the same period last year.

However, the prevalent headwinds concerning the company have kept the investors’ sentiments at bay for now, as indicated by the company’s Hold consensus rating (based on four Buys, seven Holds, and three Sells). United Airlines’ price forecast of $52.36 reflects 2.97% upside potential from current levels.

Year-to-date, shares of United Airlines have grown 11.8%.

American Airlines Group Inc. (NASDAQ: AAL)

The company’s results for the first quarter were impressive, with the net loss (adjusted) of $2.32 per share being better than the consensus estimate of $2.40 per share. Revenues of $8.9 billion were above the consensus estimate of $8.83 billion.

For the second quarter of 2022, the company anticipates revenues to increase within the 6%-8% range from the comparable quarter of 2019. Capacity is predicted to represent 92%-94% of 2019-level (second quarter).

American Airlines’ CEO Robert Isom opines that “the demand environment is very strong” and hence expects to be “profitable in the second quarter based on current fuel price assumptions.”

According to the TipRanks Website Traffic tool, AAL’s website traffic grew 18.7% in March, compared to February. Further, the footfall on the company’s website has grown 34.91% year-to-date against the same period last year.

However, looking at the company’s Moderate Sell consensus rating (based on nine Holds and four Sells), it is quite clear that analysts are cautious. American Airlines’ average price target of $16.46 suggests 18.60% downside potential.

Shares of this $13.1-billion company have grown 7.8% so far this year.

Conclusion

The U.S. airlines industry has immense growth potential as the economy is advancing well on the recovery path. The presence of major and minor hiccups is unavoidable, but the players (like United Airlines and American Airlines) are determined to emerge as winners.

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