US airline stock valuations stalled on the runway despite the travel boom

CHICAGO – The relentless demand for travel has skyrocketed bookings on US airlines, translating into windfall profits. However, their actions have not shown the same trajectory, as questions persist about the sustainability of consumer spending.

Airline shares suffered on bearish sentiment about the broader economy as interest rates rose sharply and inflation remained high, analysts said. That’s despite the fact that consumers have shifted their spending to leisure activities like travel.

The US Global Jets ETF, an exchange-traded fund that includes airlines and is seen as a proxy for the industry, is down about 30 percent from pre-pandemic levels even as passenger traffic has hit record highs. In the same time period, the S&P 500 has gained about 31 percent.

Even after a rally in airline shares so far this year, shares of United Airlines and Delta Air Lines are still trading at 5.2 and 7 times future earnings estimates, respectively. That’s well below the S&P 500’s multiple of 19.1 and below the industry average of 8.27, according to Refinitiv Eikon figures.

“It’s hard for airlines to disengage from macro trade,” said Sheila Kahyaoglu, an analyst at Jefferies.

Airlines will once again have the chance to sell their story when they report their earnings starting this week.

Delta, which reports second-quarter results on Thursday, expects earnings to nearly double this year, but its shares are still 21 percent below 2019 highs. United has forecast its earnings to more than quadruple this year, but its shares are down about 40 percent from pre-pandemic levels.

The number of skeptics has risen as short-term interest in airline shares is 4.9 percent, compared with just over 3 percent before the pandemic, TD Cowen data shows.

“Everyone is so pessimistic, but the airlines themselves are doing exceptionally well,” said Frank Holmes, chief executive of US Global Investors, which owns airline shares.

The number of passengers moving through airport checkpoints has been averaging above pre-pandemic levels since mid-May and hit a four-year high last month, Administration data showed. US Transportation Security

Strong demand has boosted airfares, allowing airlines to offset higher costs. Airlines generated 33 percent more sales in the first five months of 2023 compared to 2022, Airlines Reporting Corp (ARC) data shows.

There are no signs yet of demand for air travel abating, with ticket purchases for the remainder of 2023 up 4 percent, said Steve Solomon, ARC’s chief commercial officer.

Ticket prices have dropped due to improved supplies and a decrease in oil prices. US inflation data released Wednesday shows airfares fell a seasonally adjusted 8.1 percent in June from a month earlier, the third straight monthly drop. Year-over-year, rates were down 18.9 percent, the biggest annual drop since February 2021.

The average round-trip domestic airfare in July is $280, down 11 percent from last year, according to online travel agency Hopper. For trips to Europe, the round-trip fare is $897, down 0.8 percent.

Hayley Berg, Hopper’s chief economist, said airfares follow a seasonal pattern where they tend to peak in June, but prices aren’t crashing.

With high interest rates and rising costs of living stretching family budgets, airlines face demand questions.

Carriers often rely on big-spending corporate clients to fill high-margin seats after the summer travel season, but the recovery in corporate travel remains slow.

Airlines have said the shift in consumer spending from goods to services will continue to fuel demand. Constrained capacity due to shortages of aircraft, parts and labor are expected to continue to underpin airlines’ pricing power.

Believers in airline stocks have seen signs of hope this year.

In June, the S&P 1500 Airline Index posted its biggest monthly gain since 2021, outperforming the S&P 500. After hitting a six-month low in March, cheap valuations along with cooling oil The prices triggered a rally in airline shares, as shares of Delta, United and American Airlines have risen more than 45 percent this year, analysts said.

Holmes of Global Investors said airline stocks are poised for even more gains. “There are more advantages than disadvantages.”

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