What happened
As if airline investors didn't have enough to worry about already, now the federal government is stepping in with some pointed questions about their rising flight delays and cancellations.
Airline shares were on the decline Thursday -- a day when industry leaders were scheduled to hold a virtual meeting with Transportation Secretary Pete Buttigieg. At the close of trading, American Airlines Group (AAL -2.18%) was down 8.6%, United Airlines Holdings (UAL -2.52%) fell 8.2%, Delta Air Lines (DAL -2.62%) dropped 7.4%, and Southwest Airlines (LUV -0.54%) and JetBlue Airways (JBLU -3.12%) were down just over 6%. The S&P 500 finished down 3.3%.
So what
Airline investors have had a rough couple of years. The industry was hit hard in 2020 and 2021 due to the pandemic, and its hoped-for 2022 recovery has been complicated. Pent-up demand for travel is filling planes this summer, but higher labor costs, a pilot shortage, and soaring fuel prices have combined to limit carriers' profitability.
Those factors are also complicating flight scheduling. Airlines canceled more than 2,700 flights over the busy Memorial Day weekend, and schedules continue to be impacted by weather delays, crew shortages, and COVID-mandated crew quarantines.
Lawmakers, regulators, and officials have heard complaints from passengers, and now, they want some answers. Secretary Buttigieg will meet with airline CEOs and senior executives to discuss the flight disruptions and cancellations, and find out how they plan to remedy the situations ahead of the July 4 holiday. It is unlikely that Buttigieg will demand changes to their businesses that will impact near-term profitability. But in an environment where airline margins are already under pressure, close scrutiny from Washington could lead to additional padding of schedules that would mean fewer flights flown and bring down total revenue.
The airlines are expected to push for more investment into the Federal Aviation Administration (FAA), including greater air traffic control capacity, according to a Reuters report. The FAA in May announced plans to add staffing to its Jacksonville, Fla., traffic control center to try to relieve pressure on an area that is particularly vulnerable to delays in the summer due to thunderstorms.
Now what
After airlines weathered the near-death experience of the pandemic and juggled through a period of high costs and uncertain scheduling as air travelers slowly returned, a meeting with Washington officials is unlikely to rattle airline executives. But the complaints and the government's call to action on delays do highlight what a difficult balancing act the airlines are attempting.
The airlines took on a lot of debt earlier during the pandemic, and had hoped to use strong demand this summer to rebuild their balance sheets and begin to shift back toward normalcy. Labor issues and soaring fuel prices have complicated that equation. Airline execs also now need to worry that either high inflation will cut into consumer spending on pricey items like plane tickets, or that the Federal Reserve's efforts to fight inflation will cause a recession. Either of those scenarios would threaten travel demand in the second half of this year.
For investors who are willing to stay patient and look beyond these storm clouds, long-term demand for air travel looks solid, and the industry -- thanks to its consolidation over the last decade -- is better positioned to survive cyclical downturns and reward investors over time. Of the U.S. carriers, Delta and Southwest appear most likely to emerge ahead of the pack, and look like the best choices to invest in.
But be warned that this recovery is going to take years to play out, and if 2022 has taught us anything, it is that there is no shortage of things that can go wrong. Right now, there is no reason to rush in and buy these companies on a dip, which explains why these stocks are underperforming on a day like Thursday, when fear is dominating the market.
