US airlines: no takeoffs for shares despite the travel boom

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For US airlines, summer is the Super Bowl of travel seasons. With the Memorial Day holiday weekend kicking off, all signs suggest this could be a record-breaking season for air travel.

The number of passengers passing through airport checkpoints has been exceeded 2.65 million Thursday, the most in a single day since November 2019. Industry group Airlines for America calculates that 256.8 million people will fly between June and August, a new high. Meanwhile, airfare prices remain high.

This should be good news for major American airlines. Yet shares of Delta, American, United and Southwest are down 5% to 13% in the past three months, compared with a 4% rise for the S&P 500. Aside from United, the losses are even steeper over a period of 12 months. period. Valuations remain low, with the four airlines trading between four and nine times future earnings. The average for the S&P 500 is about 18x. Short-term interest in the industry is at a year-high, according to TD Cowen.

More passengers doesn’t automatically mean more profit. While jet fuel prices are approx a lower third compared to a year ago, the cost of labor has increased. Moody’s expects airline labor costs to rise 19% this year and another 8% in 2024. Carriers rebuilding staffing levels in the wake of the coronavirus pandemic are agreeing significant pay increases in contract negotiations. These are fixed costs that will not decrease for several years. At Delta, for example, profits are expected by Wall Street to more than double to $3.5 billion this year. But that would still be less than the $4.7 billion earned in 2019.

Heavy interest charges also keep earnings in check. Airlines have issued substantial debt during the pandemic and the sector is heavily leveraged. U.S. major and regional airlines spent $9.2 billion on interest expense and aircraft rentals last year, up from $5.9 billion in 2019, according to TD Cowen. This, coupled with recession fears, will keep down-to-earth airline stocks.