What happened
Stocks are under pressure on Thursday due to continued concerns about the impact of higher inflation rates on the economy, and airlines, as is typically the case, were down more than the broader markets. 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 traded down as much as 5%.
One notable exception is Spirit Airlines (SAVE -2.90%), the subject of a bidding war between two rival would-be buyers. Shares of Spirit climbed about 5% on new hope that a higher offer is under consideration.
So what
Airline stocks have been hit hard by inflation fears. The sector had hoped robust summer vacation demand would help lift it out of its pandemic-induced slump, but a combination of higher fuel and labor costs and an uncertain demand picture past August has instead put the stocks under pressure.
For now, there is more demand than the airlines can handle. The industry will likely cancel more than 1,500 domestic flights over the Fourth of July weekend to try to prevent system meltdowns as airports prepare to welcome passenger volumes unseen since pre-COVID days.
But most of those tickets were bought earlier in the year, before inflation spiked. The worry among investors now is that households that are suddenly facing higher prices for essential items like food and gas will defer nonessential purchases like airline tickets, causing demand to fall off in the second half of the year.
Airlines can ill afford a drop in leisure demand, as business and international travel has still not recovered to prepandemic levels.
Spirit, by contrast, is trading based on an update to the bidding war going on between JetBlue and Frontier Group Holdings (ULCC -5.36%). Spirit shareholders had been scheduled to vote today on a proposed merger with Frontier that is recommended by the Spirit board after the board dismissed a higher offer from JetBlue due to regulatory risk.
But late Wednesday, Spirit postponed the shareholder meeting until July 8 to give the board more time "to continue discussions with Frontier and JetBlue." The decision implies that either Spirit did not believe it had the votes to get the Frontier deal over the line or the board is either reconsidering its opposition to the JetBlue offer or at least trying to negotiate a higher price from Frontier.
Whatever the reasoning, investors are taking it as a sign the deal price could go up and are sending the shares higher.
Now what
Though the stocks are heading in opposite directions, the fate of Spirit Airlines is closely tied to the issues the other carriers face. The airlines are unsure about future demand and are therefore unsure about what their future outlook for organic growth will look like. Throw in a lack of available pilots and rising labor costs, and consolidation as a path for growth would seem to make a lot of sense.
The other thing that unites these two stories is uncertainty. Spirit still trades well below the $33.50-per-share cash price JetBlue is offering, reflecting continued doubt over whether the board will throw its support to JetBlue and face a prolonged regulatory review. But given the economic climate, a deal with Frontier is no regulatory slam dunk either, and Spirit is taking some risk in prolonging the process.
For the broader sector, Spirit included, there appears to be a lot more that can go wrong in the months to come in terms of demand than there is unexpected upside. That's putting pressure on all the carriers that are not subject to a takeover offer, and investors should expect that pressure to continue until there is more clarity about where the economy is heading.
