What happened
A pair of headlines gave airline stocks a lift on Tuesday morning, with shares of United Airlines Holdings (UAL -2.52%), American Airlines Group (AAL -2.18%), Delta Air Lines (DAL -2.62%), and JetBlue Airways (JBLU -3.12%) all up between 5% and 7% soon after the open. The shares have lost altitude in the hours since, but as of the early afternoon remain in the green on a day when the broader markets are down.
So what
It's a tough day for stocks in general, but airlines are flying higher than most. The so-called "legacy" carriers -- United, American, and Delta -- are also the nation's primary international airlines, and pre-pandemic China was an important growth market for international traffic.
China has been largely shut down since the onset of the pandemic, but the country is gradually moving to reopen its travel market. Overnight, China reduced the quarantine time for inbound passengers from two weeks to seven days. While still more restrictive than most markets, it is viewed as a sign that the all-important transpacific market could reopen to U.S. carriers in the months to come.
JetBlue was up on a development in its effort to wrestle Spirit Airlines (SAVE -2.90%) from merger partner Frontier Group Holdings (ULCC -5.36%). On Monday, Spirit said it still favored Frontier's cash and stock offer over a rival offer from JetBlue. But after markets closed JetBlue once again sweetened its bid, giving Spirit shareholders a lot to think about ahead of a planned Thursday vote on the Frontier deal.
With airlines scrambling to find pilots, JetBlue sees mergers and acquisitions as its best path for growth in the years to come. Although airline mergers are fraught with regulatory and integration risk, investors have warmed to the idea of JetBlue acquiring Spirit and transforming the ultra-discount brand into JetBlue's more premium, and higher-margin, profile.
Now what
The airline rally faded as broader market losses deepened, and indeed neither of these headlines offer a lot of near-term good news for the airlines involved. The "big three" of United, American, and Delta would benefit from a return of the pre-COVID-19 world, where business travel to China boosted margins. But there are myriad reasons, from COVID to geopolitical tensions to shifts in global supply chains, to question how quickly, or if at all, that business will return.
For JetBlue, there is no easy route forward. A deal for Spirit still seems a long shot, given the reluctance of Spirit's board to engage and the serious questions about how a JetBlue/Spirit deal would be received in Washington, D.C. But JetBlue's near-term outlook absent a deal is anemic, and there are few other potential merger partners out there.
The airlines were hit hard by the pandemic, and investors have known for some time now that it would likely take years for the businesses to recover. High fuel prices and the threat of a recession have only further clouded the outlook. The industry is generally moving in the right direction, but it is moving very slowly. Investors would be wise to resist the temptation to buy in for now.
