What happened
The remarkable post-pandemic momentum that airlines have enjoyed showed signs of cracks this week, and investors appear to be getting nervous.
Shares of Delta Air Lines (DAL -0.45%), Alaska Air Group (ALK -0.78%), American Airlines Group (AAL -1.60%), Allegiant Travel (ALGT -0.82%), Sun Country Airlines (SNCY 0.28%), and Frontier Group (ULCC 0.59%) all joined United Airlines (UAL -1.82%) in falling more than 10% for the week, according to data provided by S&P Global Market Intelligence, after United issued a first-quarter earnings warning.
So what
Airline investors have seen their share of ups and downs over the last few years. The industry was devastated by the pandemic, which decimated travel demand. But the industry has seen demand bounce back strong since the introduction of COVID-19 vaccines, helping the stocks to recover some of what was lost.
Demand has held up so well that United CEO Scott Kirby has suggested the effects of the pandemic, including more work flexibility, might be bullish for airlines and help balance out what has historically been a cyclical industry.
But the trajectory is not a straight line up. This week, United said it expects to post a loss of between $0.60 and $1 per share in the current quarter, significantly below the $0.63-per-share profit that Wall Street had expected. United blamed a combination of higher fuel prices and accruals from a potential new pilot deal for the miss.
Investors are betting these problems are not unique to United alone. Fuel is the single biggest nonlabor expense for airlines, and few are hedged. The industry is also facing a pilot shortage that has crimped growth, putting labor in a good position to negotiate new contracts throughout the sector.
Delta earlier this year warned first-quarter results would be impacted by its new deal with its pilots.
Throw in headlines about bank failures, and the consequential questions about the health of the economy, and airline investors were understandably nervous this week. Allegiant, Sun Country, and Frontier are all focused on budget-conscious leisure travelers and could find it hard to fill planes if the job market cools or if there is a disruption to the economy.
Now what
The good news is United reiterated its full-year guidance, meaning management is feeling good about demand patterns and believes it can make up what was lost in the first quarter as the year goes on. Indeed, if demand stays as strong as it has been, United and other airlines should have the pricing power to offset higher costs over time.
The normal January travel lull never came this year, and flights have been full through spring break. The airlines said that summer bookings look strong, though investors will be eager to hear more about that in April after first-quarter results are released.
There is no reason to panic yet, but there is enough reason for investors to be paying close attention. For those with a long-term time horizon, the industry is healthy enough to survive a down cycle, and there is no reason to run for the emergency exits. But United's warning, if nothing else, should be viewed similar to when a pilot turns on the seat belt sign: There could be turbulence up ahead.
