What happened
U.S. airlines are presenting at an industry conference on Thursday, and investors are excited about what they are saying. Shares of United Airlines Holdings (UAL 0.45%), American Airlines Group (AAL 0.62%), Southwest Airlines (LUV 0.06%), Delta Air Lines (DAL -0.71%), and JetBlue Airways (JBLU -3.39%) all traded up more than 5% on Thursday afternoon on optimism about their outlook for the year.
So what
It's a confusing time to be an airline investor. After two years of depressed revenue due to the pandemic, demand is strong heading into the important summer tourism season. But higher fuel and labor costs threaten to eat into that summer surge, and the growing threat of inflation eating into consumer spending as investors wondering how long the upswing can last.
On Thursday, a number of airlines updated their outlook for the current quarter, and investors seemed relieved with what they heard. Southwest said that demand continues to be strong, despite rising inflation, and said that although fuel costs will come in well above expectations, strong pricing power will more than offset the higher expense.
Image source: Getty Images.
JetBlue wasn't quite as upbeat, but did say that it remains confident it will be able to pass on higher fuel costs to customers in the near term due to strong demand.
Part of the reason pricing remains strong is that airlines are resisting the temptation to flood the market with additional flights. On Thursday, Delta provided a fresh indication that discipline is holding. In a memo to employees obtained by the media, the company said it would trim about 100 flights a day in the U.S. and Latin America in July and early August to help ensure the reliability of its schedule.
Weather delays tend to wreak havoc on summer schedules even in the best of times, and with the lingering threat of COVID-19 cases causing disruptions, Delta has decided not to push its schedule too tight. The airlines are also dealing with labor shortages, which are providing a cap on how quickly they could expand even if they want to.
Now what
The good news is demand is strong enough to offset cost pressures. The bad news is that these conditions are causing the airlines to leave a lot of money on the table. As Cowen analyst Helene Becker put it in a Thursday note to investors, JetBlue is really saying that its higher revenue won't lead to a smaller loss.
This status quo is a lot better than in the spring of 2020, when no one was flying. And the airlines have the wherewithal to navigate current conditions for a long time. The issue for investors is that the constraints caused by cost headwinds are likely to put a near-term cap on how high the sector can soar as well.
For those willing to ride through the turbulence, Delta's proactive trimming is a reminder of why it is a best-of-class carrier. Since the start of the pandemic, the company has tried to position itself as the carrier of choice for travelers through more reliable scheduling and keeping safety requirements in place well past when they were required. In a business where for decades the airlines chased the extra dollar of revenue even at the expense of profitability, it is encouraging to see capacity discipline holding up during the busy summer months.
