What happened
Two of the nation's largest airlines have issued positive forecasts for the year, and airline stocks are gaining altitude as a result. Shares of both American Airlines Group (AAL -2.18%) and United Airlines Holdings (UAL -2.52%), the two airlines that reported in the last 24 hours, traded up as much as 12% on Thursday, while shares of Delta Air Lines (DAL -2.62%), Southwest Airlines (LUV -0.54%), and JetBlue Airways (JBLU -3.12%) are going up at least 5% apiece.
So what
Airline investors had high hopes heading into this earnings season, and so far the companies who have reported have not disappointed. Delta got things off to a good start last week, and the optimism continued on Wednesday night and Thursday morning with reports from United and American, respectively.
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On Wednesday after markets closed, United reported a first-quarter loss of $4.24 per share on $7.6 billion of revenue. Though the loss was a few pennies more than had been expected, United predicted a profit for both the second quarter and the full year. Management said it is seeing improved business traffic as companies return to the office, as well as a rebound in international demand.
United also said it expects to post an operating margin of about 10% for the second quarter, which would be well above what analysts expect given soaring jet fuel prices in recent weeks.
American kept the momentum going on Thursday morning, reporting a $2.32 per-share loss on revenue of $8.9 billion. American's per-share number came in slightly above analyst expectations, and the airline provided a similar upbeat forecast about the quarters ahead. American spoke of strong demand heading into the summer months that is offsetting higher fuel and labor expenses.
Though earnings reports are company-specific, it is easy to see how the commentary by United and American can be applied to the entire industry. After two years of pandemic-induced choppy demand, passengers are returning to the skies, and the airlines are poised to capitalize on the rebound and generate stronger results.
Now what
From the pandemic to the impact of the war in Ukraine on oil prices, airline investors have had no shortage of things to worry about over the last few years. We went into 2022 hoping it would be a recovery year, and there was every reason to worry that fuel costs and inflation worries would crimp travel budgets and push back the rebound. These earnings reports are evidence that those concerns were overblown, and demand is still strong, which is enough to fuel this rally.
For current investors, enjoy the ride. But I'd be cautious about adding new money to the sector right now. The pandemic is not yet over, and it is possible a fresh variant or new surge could eat into demand in the months to come. And the inflation story continues to play out. We still don't know for sure whether it will eventually put a strain on household budgets and cause people to rethink their travel plans.
At best, the airlines are in for a multiyear recovery following revenue falling to near zero during the height of the pandemic. All signs point to each and every one of these airlines making a recovery, but given the extended timeline and the continued uncertainty, investors would be wise to brace for more turbulence as the year goes on.
