What happened

It has been a surprisingly shaky earnings season for airlines, which have seen strong summer demand but also have questions about the quarters to come. Investors have tended to see the glass as half-empty.

Shares of JetBlue Airways (JBLU 1.05%), Frontier Group (ULCC -2.08%), and Spirit Airlines (SAVE) fell as much as 15.7%, 13.6%, and 12.5%, respectively, for the week as of Thursday afternoon, according to data provided by S&P Global Market Intelligence.

So what

Airline stocks have taken investors on a wild ride over the last three years. The pandemic wiped out demand for travel and raised questions about whether some airlines would survive, but a post-vaccine surge in demand has led to full planes and improved margins.

The question is how long the good times can last. Historically, rising rates and questions about the economy would lead to a slowdown in travel as belt-tightening companies and households prioritize their expenses. Though the airlines have held up well so far, this quarter's earnings and commentary have done little to reassure investors.

  • JetBlue earnings were in line with expectations, but the company warned it could fall to a loss in the third quarter and full-year earnings would be well below expectations due to the termination of a joint venture with American Airlines Group, higher costs, and questions about demand heading into the fall.
  • Frontier beat expectations for the quarter, but brought down guidance for the second half of the year.
  • Spirit missed expectations, saying that demand during the summer travel season "has been softer than expected" and has impacted pricing.

Add it all up and investors are concluding that this highly cyclical business is entering the wrong part of the cycle.

Now what

It is hard to believe that barely a year ago JetBlue and Frontier were engaged in a bidding war for Spirit, part of a scramble to grab extra capacity to meet seemingly endless demand. JetBlue won that battle, but is now left trying to navigate regulatory hurdles and other complexities even as cracks in the demand picture are beginning to show.

The good news for investors is that unlike previous downturns, where airline bankruptcies were commonplace, the industry is on much firmer financial footing than it has been for decades. But the need for labor and soaring demand has reset wage rates higher, which as investors saw in the quarter could eat into profitability for years to come.

For long-term focused investors willing to ride out the cycle, Frontier has one of the best growth stories in the industry. But it will take time to play out. JetBlue and Spirit are both in a holding pattern waiting for antitrust approval for their deal, with both companies facing the prospect of being materially weaker should the deal fall through.

As demand falters, it is a better time to buy an airline ticket than an airline stock.