Investors are increasingly growing fearful that the economy is slowing, leading to yet another day where markets are in the red. Airline stocks are getting caught up in the sell-off, with a basket of carriers including Delta Air Lines (DAL 3.03%), United Airlines Holdings (UAL 2.13%), American Airlines Group (AAL 4.75%), and JetBlue Airways (JBLU 4.75%) all down about 5% in midday trading Tuesday.
2022 has been a year of changing expectations for airline investors. Coming into the year, investors were hopeful that strong demand would help the industry make up for losses sustained during the height of the pandemic, when few were traveling. But an eager consumer has been at least partially offset by higher fuel and labor costs.
Investors are now becoming worried that the demand side of the equation might not be sustainable. Earnings season has brought a handful of surprises from retailers, seemingly indicating that inflation is eating into consumer spending.
Airlines by and large were bullish on how the second quarter was going when they last updated investors, but travel tends to be booked well in advance and a lot of that demand likely came in before inflation became a hot topic. Retailers would likely see the impact of a consumer pullback almost immediately in their results, and weakness there can be seen as an indication that airlines might not enjoy as much pricing power in the back half of the summer and heading into the fall.
JetBlue could be under added pressure today due to a small development in its ongoing campaign to acquire Spirit Airlines. Spirit CEO Ted Christie said it was "unlikely" the airline's shareholders would reject Spirit's proposed merger with Frontier Group Holdings, a necessary step in JetBlue's plan to snatch Spirit for itself. Spirit will hold a shareholder meeting on June 10 to vote on the Frontier transaction.
It's hard to say anything definitive on inflation or how airline demand will hold up in the second half of the year. In one sense, after a couple of years stuck at home, there is clearly pent-up demand for travel and experiences. But potential threats including inflation, new COVID-19 waves, and anemic business travel demand weigh heavily on investors.
In times of great uncertainty, it really isn't a surprise to see investors sitting on the sidelines and for there to be a lack of buyers of these stocks. All of the airlines should have balance sheets healthy enough to survive whatever comes their way, but it could take years before their businesses fully recover and the sector can really push higher.
For those willing to buy in today and ride through the turbulence, Delta is a best-in-class operator that is set up well to recover ahead of some of its peers. But given how long this journey is likely to take, there isn't a reason for investors to jump on board right now.