The U.S. airline sector took off at the start of 2023 but the rally has encountered some turbulence in recent weeks ahead of a crucial few months for the industry.
The sector’s big gains this year probably means that not all airline stocks will keep climbing. Still, now isn’t the time to abandon the sector altogether, particularly given its choppy trading and early indications that leisure, international, and business travel look strong heading into the key spring and summer months.
If that proves to be the case, it favors larger legacy carriers, such as
(ticker: UAL) and
Delta Air Lines
The NYSE Arca Global Airline Index, which tracks the performance of carriers around the world, is up 16% so far this year, outperforming the S&P 500’s 3.4% rise over the same period.
As of Tuesday’s close, United was up 38%,
(AAL) had climbed 26%, while low-cost airline
(JBLU) was up 28%.
But the index has fallen 6.5% from its early February highs amid broader market declines and as investors have started to question whether the sector’s rally is done. Robust demand, coupled with capacity constraints, has enabled airlines to hike fares, which has underpinned the sector’s strong performance in recent months.
Carriers’ plans to boost capacity this year—along with trends in revenue per available seat mile starting to slow—have raised concerns about whether the good times can continue.
Short sellers increased bets against the industry in the 30 days to Feb. 17, despite giving back all their pandemic-era profits due to the 2023 rally, according to data from S3 Partners.
“Even with the recent mark-to-market losses we are not seeing short covering,” S3 Partners Managing Director Ihor Dusaniwsky told Barron’s.
Those doubts about where the sector’s rally goes next are perhaps understandable—a crucial period of the year for airlines is fast approaching, and one that will likely shape the rest of 2023.
March is typically the month that “makes or breaks” airlines as leisure demand picks up as winter ends, analysts at Melius Research said. They recently downgraded the sector to Neutral from Positive, noting that its outperformance meant it was “time to be more selective.”
Wolfe Research analyst Scott Group lowered his sector rating to Market Underweight earlier this month, citing record capacity growth, costs creeping higher, and signs that revenue trends are slowing. But he continues “to favor legacy airlines within the group, with an Outperform rating on Delta.” Conversely he rates JetBlue and American as Underperform.
United Airlines provided an early sign that spring, and therefore summer, demand may be strong. The company revealed that March bookings are currently more than 30% higher than 2019 levels, at a recent conference. Business demand has also recovered to 97% of 2019 levels in the first few weeks of February.
Furthermore, there are signs that strong pricing will continue.
The average round trip airfare to Europe in March and April will cost travelers $706—a 45% increase on 2022 and 16% higher than the pre-pandemic levels of 2019—according to data from online travel agency Hopper. Domestic airfares have jumped to an average $264 per ticket, 20% higher than last year and 5% above 2019 levels.
The international travel recovery is expected to ramp up into the summer months. As a result, those U.S. airlines operating more international routes may benefit from increased thrust. The same goes for business travel, if United’s commentary is consistent across the industry.
Melius analyst Conor Cunningham noted that they favor Delta, United, and
in that regard. “When looking for opportunities within the airlines, we gravitate to the airlines where there is further upside in the recovery (corporate & international travel) and are running stable operations,” he wrote.
That thesis rules out Southwest, though the carrier did emerge from last week’s winter weather relatively unscathed, at least compared to its holiday travel disruption.
It’s a risk—but if investors are willing to believe the carrier has made itself more resilient since the holiday season, Southwest stock could catch up on some of the rally it missed at the start of the year.
Write to Callum Keown at firstname.lastname@example.org