Holidays and Airlines stocks
Horde of US holidaymakers are returning, airports crowded, hotels and national parks filled up. The second-quarter profits of Airlines should offer some insight into what is going on following the summer boom.
Delta Air Lines reports its second-quarter earnings before the market opens on Wednesday, and it will provide a travel outlook for the late summer and fall. Its rivals will report in the coming weeks.
A surge in bookings this spring and summer, as well as customers willing to pay higher air fares, provided much-needed relief for US airlines, which collectively lost more than $35 billion last year. According to airline executives, the recovery has been led primarily by leisure customers traveling domestically, with that segment approaching 2019 levels.
Nonetheless, analysts anticipate that carriers will report losses in the second quarter.
The comments of airline executives are likely to drive the sector’s next stock moves. Share prices for US airlines have fallen in the last month as jet fuel prices have risen and the rapidly spreading delta variant of Covid-19 has raised concerns about new cases.
Delta and Southwest Airlines have both seen their stock prices fall by more than 9% in the last month. United Airlines shares fell more than 12% and American Airlines shares fell more than 13% during the same period, while the S&P 500 gained about 3%.
However, the market isn’t fully appreciating the sharp rebound in air travel demand, according to Deutsche Bank airline analyst Michael Linenberg in a note this week. According to him, the airline industry in the United States is on track to return to profitability in the fourth quarter, and some airlines may do so sooner.
Here are four issues to look out for in airline second-quarter results.
1.International business travel
Bussess travel is critical to reviving airlines’ profitability, especially after summer vacationers return home. Analysts do not expect the four largest U.S. airlines to report positive net income in the second quarter, and revenue, while up significantly from last year, continues to lag behind pre-pandemic levels.
Corporate travelers are less price sensitive than leisure customers, and they are more likely to purchase expensive last-minute tickets. In announcing its record 270-plane Boeing and Airbus order last month, United’s chief commercial officer, Andrew Nocella, stated that the standard coach cabin accounted for only 30 percent of United’s revenue in 2019.
Business travel has begun to recover, but it is still far below pre-pandemic levels. Last month, United Airlines CEO Scott Kirby told that business travel is down 60% compared to before the pandemic, an improvement from March, when it was down about 90%. He believes that business travel will not return to pre-pandemic levels until 2023.
Long-distance international travel remains weak, with many foreign visitors still subject to travel restrictions in the United States. Summer Europe schedules have been strategically built up by airlines to countries such as Greece, Spain, and Italy, which have reopened their borders to US and other international visitors. Business travel is critical to reviving airlines’ profitability, especially after summer vacationers return home. Analysts do not expect the four largest U.S. airlines to report positive net income in the second quarter, and revenue, while up significantly from last year, continues to lag behind pre-pandemic levels.
As demand recovers, airline executives will provide updates on their labor costs and hiring plans.
Thousands of employees took buyouts or leaves of absence at the companies’ request, resulting in staffing shortages in some areas of the business, such as customer service lines, as travel demand increased.
Airlines such as American and Delta are rehiring and looking for new employees. Meanwhile, airlines have begun or plan to resume hiring pilots, and flight attendants are in high demand at some carriers, including Southwest.
3.The cost of jet fuel
Meanwhile, the cost of jet fuel is rising. According to S&P Global Platts, the price of Gulf Coast jet fuel in the United States was $1.9524 per gallon on July 2, the highest since January 7, 2020.
“We expect 2Q21 fuel costs to outpace expectations, and we wouldn’t be surprised if 3Q21 jet fuel guidance comes in ahead of where the sell-side is modeling,” said Helane Becker, a Cowen airline analyst.
In a July 6 note, Goldman Sachs predicted that jet fuel would weigh on airlines’ bottom lines this year, though it assumed that “a portion of the uptick in the fuel bill is passed on via revenue in the out years of our forecast when demand has recovered in earnest.”
Airline executives will also provide an update on how many flights they intend to operate this fall. Revenue and yields will be heavily influenced by how well they match flying to demand following the summer rush.
Southwest said last month that it expects August capacity to be roughly in line with the same month in 2019, but carriers are expected to provide details about booking trends this fall, including holidays such as Thanksgiving.
JPMorgan said in the note that the company should be able to sustain that increase in the coming quarters.
We “see a path to upside for the shares in the medium term,” the note said, citing “upside to iPhone 12 estimates as well as low investor expectations heading into the iPhone 13 launch.”
Many analysts and investors have referred to last year’s iPhone 12 launch as a “super cycle” for the tech giant, while the upcoming iPhone 13 is expected to be more modest. According to JPMorgan, if the phone proves popular, this could create opportunities in the future.
“With the launch of iPhone SE3 in 2022, Apple has the opportunity to not only pleasantly surprise with a more robust iPhone 13 cycle, but also to drive material upside to consensus expectations for FY22,”.
A shortage of semiconductors and rolling breakouts of Covid-19 have wreaked havoc on tech supply chains, but Apple is faring better than its major smartphone rivals, according to JPMorgan.