What happened
United Airlines (UAL +6.80%) announced it expects to record a loss in the current quarter, and not the gain investors had expected, due to higher fuel prices and other issues.
The warning has the entire industry under pressure, with shares of United and Delta Air Lines (DAL +3.50%) down about 6% as of 11:56 a.m. ET. Spirit Airlines (SAVE +0.00%) stock declined a more modest 0.5%.
So what
The airline industry has enjoyed a nice post-pandemic recovery in demand, but that comes with additional costs. Late Tuesday, United said that it expects to post a loss of between $0.60 per share and $1 per share in the current quarter, significantly below the $0.63-per-share profit that analysts had expected.
United blamed a combination of accruals for a potential pilot contract and higher jet fuel prices for the earnings miss. The issues are expected to be short-lived, as the company reaffirmed its previous guidance of $10 to $12 per share in earnings for the full year.
Analysts are expecting full-year earnings of $8.70 per share.
A lot of these issues go far beyond United. Fuel is an expense for all airlines, and can account for as much as one-third of operating expenses. Much of the industry is currently in various stages of reworking their labor deals. Delta had previously trimmed its guidance to account for the cost of increased wages.
Spirit could be feeling other pressures as well. TD Cowen analyst Helene Becker lowered her price target on the airline to $20 from $30 on concerns about the margin hit from higher fuel prices and ongoing maintenance delays.
NASDAQ: UAL
Key Data Points
Now what
For those able to look past the headlines, this sell-off could be a potential buying opportunity. Revenue trends remain strong, giving the airlines the pricing power to pass on higher fuel and labor costs to customers over time. Note that United remained confident about its full-year guidance, a sign that it expects the headwinds to resolve as the year goes on.
Airlines have historically done poorly during economic slowdowns, but the forecast for strong travel demand this summer is encouraging. Investors should continue to watch for signs of trouble, but temporary turbulence like what United disclosed overnight is no reason to race for the emergency exits.
