What happened
Aviation is a global business, and the airlines tend to underperform when the world is in crisis. With that in mind, investors ran to the exits following Russia's invasion into Ukraine. Shares of the entire industry were in the red this week, with Delta Air Lines (DAL 1.06%), United Airlines Holdings (UAL 0.25%), American Airlines Group (AAL 0.72%), Alaska Air Group (ALK 0.30%), and JetBlue Airways (JBLU 2.08%) all down 9% or more for the week as of midday trading on Thursday, according to data provided by S&P Global Market Intelligence.
So what
Airline investors have faced a difficult couple of years. The industry was hit hard by the pandemic, which caused travel demand to plummet, and attempts to get off the mat following the introduction of vaccines have repeatedly been thwarted by new variants. The war in Ukraine figures to add to the industry's woes.
Image source: Getty Images.
For one, the conflict with Russia has caused oil to spike to levels unseen since 2014. Fuel accounts for upward of 30% of an airline's costs, and current prices are well above what airlines had expected when they issued guidance back in January. That suggests earnings revisions are coming, and positive commentary from the industry about the outlook for profits in 2022 might be off the table.
Coming into 2022, investors had high hopes for the airlines. An uptick in demand, especially among summer tourists, was supposed to help rebuild balance sheets bruised by the pandemic. And while an international travel recovery is still likely more than a year off, any uptick would have helped boost the bottom line.
International tourism is now very much in doubt, and domestic travel might at least in part depend on what the war and possible repercussions like higher prices at the pump will have on consumer confidence. The only thing that is clear is that there isn't much about the outlook for airlines in 2022 that is clear, and that is causing investors to look elsewhere.
Now what
This is an odd moment for airline investors. All of the reasons to be bullish about the sector's long-term growth prospects, including a growing global middle class, more mobility, and pent-up demand after two years of lockdown, remain in place. But there is also little reason to get too excited about the coming months or quarters. The COVID hangover on balance sheets is likely to be felt into the second half of the decade, and we have no idea when we will see robust business or international demand again.
For those with a strong tolerance for risk, Delta and Alaska are the best choices from this group. Delta is run by a management team that prior to the pandemic had revolutionized pricing, helping so-called legacy airlines like Delta, United, and American to better compete against discounters. Alaska has a strong route network primarily on the West Coast and a history of being a strong operator.
But be advised, the next few months could get worse before there are any signs to suggest things are going to get better. And even if the war is quickly over and oil prices fall back, the industry still has a rough road ahead before conditions fully normalize.
Given the turbulent ride airline investors have had to endure over the last two years, it is no surprise that many have no interest in climbing aboard now during a time of war.
