It was a good week for airline stocks. A key government COVID-19 restriction was put on ice, and earnings season pointed to better days ahead.
The whole industry took flight as a result, with United Airlines Holdings (UAL -0.02%) up 15% through Thursday trading, and American Airlines Group (AAL -0.85%) and Hawaiian Holdings (HA -3.06%) each adding more than 10%.
The airline industry has been hit hard by the pandemic. And while it is still way premature to say COVID-19 is behind us, airline investors did get to cheer an important symbolic milestone this week as the mandate that passengers wear masks while on board was at least temporarily struck down. The airlines have been lobbying for eased restrictions on flyers, part of a broader effort to try to entice passengers back.
The government is planning to appeal the court decision that struck down the mandate, so masks might one day return. However, earnings season is giving a strong indication that passengers aren't waiting around to book summer travel. Good news from Delta Air Lines (DAL 0.14%) last week started a rally in airline shares that was accelerated on Thursday after American and United reported.
Both United and American, like Delta before them, lost money in the first quarter. But all three airlines were bullish on summer travel demand and confident about full-year profitability. Significantly, all three airlines are telling investors that strong demand and limited capacity are giving them the pricing power to offset spiking fuel prices. Heading into earnings season, fears of higher costs due to Russia's invasion of Ukraine were weighing heavily on investors' minds, and the upbeat forecasts triggered a relief rally in the shares.
Hawaiian doesn't plan on reporting earnings until after markets close on Tuesday, April 26, but it is straightforward to apply what the big three airlines are saying about demand and pricing power to the entire industry.
The evidence all suggests the worst is finally over for the airline industry, and we are on the path to recovery. But airline investors should be aware that path is long, and there is still additional potential turbulence on the horizon.
It's hard to imagine demand softening even if the mask mandate is restored, but COVID-19 cases are ticking up in some regions and there could be another surge or a new variant that ripples through the summer travel months, crimping demand. It is also too soon to say how much rising inflation will impact demand.
If all goes to plan, the airlines will hopefully see the beginnings of a recovery in demand for business and international travel in the months to come, and see operations return to pre-pandemic levels by the end of 2023. That's a lot of time for things to not go according to plan. Investors buying in now should keep their seatbelts fastened: As good as the last few weeks have been, there is likely more volatility up ahead for the airline sector.