What happened
Economic data is coming in strong, travelers are returning to the skies, and airlines are soaring. Shares of Delta Air Lines (DAL 1.41%), American Airlines Group (AAL 2.83%), United Airlines Holdings (UAL 2.00%), Southwest Airlines (LUV 2.08%), JetBlue Airways (JBLU 3.20%), and Spirit Airlines (SAVE +0.00%) were all up 6% or more in Friday trading as investors cheered strong macro news and a fresh data point supporting the argument that there is pent up demand for air travel.
So what
The airlines were hit hard by the pandemic, but have seen a steady return in travel this year as the COVID-19 vaccine became more widespread. But while the industry is filling its seats, it is doing so mostly thanks to low-margin domestic vacation travelers. Airlines rely on premium fares from business travelers and international trips to boost profitability, and so far those segments of the market have been sluggish.
Image source: Getty Images.
There are signs that is beginning to change. On Friday, Delta said that it saw a 450% jump in international bookings in the six weeks since the United States announced plans to reopen international borders. On Sept. 20, the White House said the country would reopen in November to travelers from 33 countries, including most of Europe, who are fully vaccinated.
Delta said it expects to operate 139 flights from 55 international destinations on day one, Nov. 8. The company said many of those flights are expected to operate at 100% capacity that day.
"This is the start of a new era for travel and for many people around the world who have not been able to see loved ones for almost two years," CEO Ed Bastian said in a statement. "While we have seen many countries reopen their borders to American visitors over the summer, our international customers have not been able to fly with us or visit the U.S. All of that changes now."
There is other good news fueling the airline rally. The Biden administration is delaying a vaccine mandate for federal contractors, including airlines, to Jan. 4, from Dec. 8. In response, American is pushing back its own internal deadline for employees to be vaccinated, giving the carrier more time to work out its schedule, get employees compliant, and reduce the risk of an airline systemwide meltdown over the holiday travel period.
Wall Street is also in rally mode Friday after a Labor Department report that showed non-farm payrolls rose by 531,000 jobs last month, ahead of the 450,000 expected. The unemployment rate fell to 4.6%, its lowest mark since March 2020, and hourly earnings rose by 4.9%. Airlines do best when the economy is strong and travelers have money to spend, making this report bullish for the sector.
Now what
We're on a path toward a recovery, but investors should be warned airlines will not be able to get there overnight. Delta's news on international demand is one of the more bullish industry-specific data points I've seen in recent months, but it only marks the beginning of a rebound that could take until 2023 or 2024 to fully materialize.
Investors interested in buying into the rally should expect to buckle up and prepare for additional turbulence should the next data points not come in as strong as these, and focus on top names. Delta was an industry leader heading into the pandemic and appears likely to be one of the first of the old-line airlines to recover. Southwest and Spirit are the champions of the domestic recovery, and should benefit more than most from continued strong U.S. economic news.
The bottom line is airlines appear to be headed in the right direction, and investors are climbing aboard on Friday as the broader markets are in rally mode.
