The nation's smaller, discount airlines made most of the news this week, but the industry giants went along for the ride. Shares of Delta Air Lines (DAL -1.65%), United Airlines Holdings (UAL -1.42%), and American Airlines Group (AAL -1.23%) all traded up more than 11% for the week as of Friday morning, according to data provided by S&P Global Market Intelligence, as a wave of optimism about 2022 swept through the sector.
This week in airlines started with Monday's blockbuster announcement that Frontier Group Holdings (ULCC -3.10%) and Spirit Airlines (SAVE -0.18%) planned to combine in a deal valued at more than $6.6 billion. The deal would create the nation's fifth largest carrier, and long-term could mean a more formidable rival to the big three.
But in the near term the context of the deal moved the entire industry higher. Airlines have faced a difficult two years due to the pandemic, but the Frontier/Spirit move is based squarely on the opportunity for post-pandemic growth. Airline investors for months now have been searching for signs that the industry believes the worst of the pandemic is over, and the deal was read as a major step in that direction.
Another discounter, Sun Country Airlines Holdings (SNCY 0.41%), added to the enthusiasm midweek when it reported earnings that came in well ahead of expectations. On the post-earnings call, Sun Country CEO Jude Bricker told analysts that a silver lining to the industrywide struggle to find pilots is he expects higher airfares ahead, and less temptation to engage in margin-destroying fare wars by flooding markets with capacity.
In years past, airlines often didn't fully benefit from good times because some of the market participants would use rock-bottom pricing to try to attract more business. Given the constraints caused by the pilot shortage, there could be a better chance of fare discipline this summer.
The airlines do appear well on their way toward getting back to normal, but investors should be warned there is still a long journey ahead. It will likely take until late 2023 at the earliest before these major airlines see all-important business and international travel fully recover, and the carriers will also need time to repair balance sheets bruised by the pandemic.
Throw in the potential for a new variant or some other twist to the pandemic, and there is a lot that can go wrong from here. For long-term minded investors who can handle turbulence, Delta is the top pick among these major airlines due to its strong management team and relatively healthy balance sheet. But holders of any of these airlines should keep their seatbelts fastened even after a strong week.