The early takeaways from earnings season suggest that the economy is not spiraling into an inevitable recession. That sentiment is giving stocks a lift on Tuesday, and airlines are going along for the ride.
Shares of Delta Air Lines (DAL 0.29%), American Airlines Group (AAL 2.54%), and United Airlines Holdings (UAL 0.70%) all rose as much as 5% on the hope that demand will hold up and the post-pandemic sector recovery can continue.
Airline investors were on edge coming into earnings season, and Delta's move last week to lower expectations for the rest of the year did little to calm those fears. The industry was hit hard by the pandemic, but investors had hoped the worst was now behind us and strong travel demand this year would help the carriers rebuild their balance sheets.
The demand materialized as expected, but it has not resulted in outsized profitability for the sector. The airlines are grappling with issues including a lack of pilots and high fuel prices, meaning that much of the extra revenue they are bringing in selling tickets into a hot market is going out the door in the form of expenses.
The last thing airlines need right now is for inflation or a recession to stunt that demand. Investors realize this, and of late the industry has been trading up and down largely with the broader market sentiment on the health of the economy.
Wall Street was solidly in the green on Tuesday, with the S&P 500 up more than 2.5% in afternoon trading, on analyst commentary that so far earnings season is holding up better than feared.
Investors will have airline-specific news to trade on in the coming days, as United and American are both expected to release second-quarter results this week. Like with Delta, the focus will not be so much on what United and American did in the second quarter but rather on what management sees happening up ahead.
Most of the travelers flying right now booked their trips months ago, before inflation heated up. Investors should be listening carefully for management commentary on how strong fall bookings are coming in now, and whether or not business travelers are returning to the skies.
The worst is likely over, but the recovery has only begun. Airline stocks have been making oversized moves up and down based on economic sentiment, but the carriers are going to have to post real progress paying down their debt and demonstrate demand is sustainable for the stocks to really take off from here.