Airline stocks are trading lower in early US price action today after both American Airlines (NYSE: AAL) and United Airlines (NYSE: UAL) disappointed markets with their respective second-quarter earnings.
Things have been tough for airline companies since the onset of the COVID-19 pandemic. While U.S. companies managed to survive the pandemic, thanks to the generous stimulus from the government, they are now saddled with a lot of debt.
In 2021, aviation companies benefited from the pent-up travel demand. However, soon the omicron variant of the coronavirus hit the world. Since then, rising fuel prices, a slowing economy, and worker shortages have been taking a toll on the sector.
Many US companies have gone slow on hiring new workers. The list continues to expand and both Apple and Alphabet are reconsidering their hiring plans with the latter putting a two-week hiring freeze.
Coming back to airline companies, they have now returned to profitability without federal aid. UAL for instance posted a $329 million profit in the second quarter. UAL CEO Scott Kirby said, “It’s nice to return to profitability — but we must confront three risks that could grow over the next 6-18 months.” He added, “Industry-wide operational challenges that limit the system’s capacity, record fuel prices and the increasing possibility of a global recession are each real challenges that we are already addressing.”
While it admitted that the slowing economy is a headwind, it said that it expects it to be more than offset by the continued pent-up demand. UAL said that it expects to be profitable on a full-year basis in 2022. Delta Airlines, which posted its earnings last week, also expects to be profitable on a full-year basis.
AAL also Posted a Profit in the Second Quarter
AAL also posted a net profit of $476 million in the second quarter. The company posted record revenue of $13.4 billion in the quarter, which was 12.2% higher than the corresponding period in 2019. Like fellow airline companies, AAL’s revenues have received a boost from higher ticket pricing.
Commenting on the earnings, AAL said, “Domestic leisure travel remains very strong and surpassed 2019 levels in the second quarter and American also saw improvements in corporate and government revenue in the quarter. Demand for international travel also improved steadily during the second quarter and the company expects this to continue following the lifting of the COVID-19 testing requirement for inbound travel to the U.S.”
It also forecasted that it would be profitable in the third quarter. Nonetheless, despite the earnings being largely in line with estimates, AAL stock is trading lower today, and so are other airline stocks.
Airline Companies Are Battling Several Headwinds
Airline companies are still flying below their 2019 operating levels. The market opinion towards aviation stocks is mixed. While some analysts find airline stocks cheap, others see them as a risky proposition considering the recession fears. The demand for airline companies dips during a recession as people cut down on leisure during periods of economic turmoil. However, air travel is holding up well despite high travel costs.
Warren Buffett, who is otherwise known for making sound investments, incurred billions of dollars in losses as he sold all four US airlines that he was holding.
While there have been layoffs in several tech companies and Amazon finds itself overstaffed, airline companies are grappling with a shortage of staff which has led to intermittent flight delays and cancelations in the US as well as Europe.
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