What happened
Airline stocks started Wednesday on an up note, fueled by positive commentary from Delta Air Lines (DAL -0.58%). But a grim forecast from JPMorgan Chase CEO Jamie Dimon gave rise to fresh recession fears, causing shares of Delta, American Airlines Group (AAL 0.64%), United Airlines Holdings (UAL -0.08%), and JetBlue Airways (JBLU) to all trade down 5% or more.
So what
As we've noted before, airline stocks are stuck in a holding pattern right now. Strong demand and pricing power is leading to higher-than-expected revenue growth throughout the industry, but that is being offset by higher costs. And with significant uncertainty surrounding issues ranging from a new COVID wave to a falloff in consumer demand, the stocks have had trouble climbing higher.
Image source: Delta Air Lines.
Delta got the trading day off to a positive start, releasing updated guidance that called for stronger revenue and operating margins than initially expected. Total revenue is expected to be 7% to 8% better than initially expected, and a forecasted operating margin of 13% to 14% would be at the high end of the initial guidance despite fuel prices that are up more than 70% from 2019.
Investors are well aware of the cost issues, but Delta's apparent ability to pass those costs on to consumers in the form of higher ticket prices is a positive sign. As a result, Delta initially traded up 1.8% on Wednesday morning, with other airline stocks following its lead.
The rally turned south along with the broader market after Dimon, speaking at an investor conference, said the U.S. economy faces a "hurricane" as the Federal Reserve attempts to battle rising inflation. Dimon is one of the most respected CEOs on Wall Street, and his bank's massive size and exposure to different markets give him a good view of how the economy is shifting.
The health of the economy is weighing on airline investors because airline tickets, by and large, are a discretionary spending item. If consumers are feeling the pinch of inflation, or worried about the direction that the economy is heading, it could cause them to postpone travel plans. Delta and other airlines have made it clear that the second quarter will come in strong, but many of those tickets were bought months ago. It is far less certain how sustainable this strong demand is, or what will happen to airlines once the summer vacation season ends.
Now what
There were other glimmers of hope out of Delta that should not be ignored. CEO Ed Bastian said during a presentation at an investor conference that corporate travel remains depressed in part because business flyers right now must "fight to get back on the airplane," a comment on just how strong leisure demand is right now. The implication is there are no seats left for last-minute business travel.
Business travel has been sluggish since the onset of the pandemic, and a recovery in corporate travel would go a long way toward filling the seats when the summer ends. Of course, those economic factors that Dimon mentioned could put a lid on business travel as well, but airline investors will be happy to know that demand for business tickets is on the upswing.
The issue, as it has been for a while, is that this recovery will take time. And with so much uncertainty about the economy and the pandemic, there is probably more risk to the downside than potential for a dramatic rise in the months to come.
Delta's update is a reminder that it is a well-run airline that seems likely to recover before some of the competition, but in this macro environment there is only so much any individual company can do. Thursday's trading action is a reminder to investors how much airline stocks right now are tied to conditions beyond their control.
