Oil prices collapsed. And airlines reported a better than expected pick up in traffic.
So airline stocks soared with the most stressed operators showing the biggest gains in their shares.
Delta Air Lines (DAL) closed up 8.70% on the day. United Airlines (ULA) picked up 9.19%. And American Airlines (AAL) gained 9.26%.
In contrast Southwest Airlines (LUV), the airline that is among the least stressed by higher fuel prices, gained only 4.89% today.
U.S. crude benchmark West Texas Intermediate plunged 7.94% to $94.83 a barrel on renewed hopes for the lifting of sanctions on Iranian oil on a deal that slows the country’s progress toward nuclear weapons, and on fears that the huge lockdown in China as that country attempts to control the largest COVID-19 outbreak since the start of the Pandemic will cut into global growth and demand for oil.
Among the major stock market indexes, the Standard & Poor’s 500 was up 2.14% at the close. The Dow Jones Industrial Average gained 1.82%. The NASDAQ Composite rose 2.92%. And the small cap Russell 2000 added 1.40%.
Leading off the rally in airline stocks today were projections from the airlines of higher than expected revenue in the first quarter of 2022 on a continued recovery toward pre-Pandemic levels of air travel.
Delta Air Lines, for example, said it now expects revenue in the March quarter to recover to 78% of 2019 levels, up from a previous guidance of between 72% and 76% issued in January. It also expects total revenue per available seat mile to be flat versus March 2019.
United Airlines also provided a guidance update saying now its revenue in the first quarter of 2022 will be “near the better end” of its range of 20% to 25% lower than the first quarter of 2019 levels.
American Airlines said it expects revenue to be 17% lower than the first quarter of 2019, up from its earlier forecast for a 20% to 22% drop. But the airline warned it has no outstanding hedges on the price of jet fuel, adding it was “fully exposed” to fuel-price fluctuations.
Southwest Airlines said first-quarter revenue will be down 8% to 10% from the first quarter of 2019. That’s an improvement on previous guidance for a 10% to 15% drop. Southwest said revenue trends have improved in March following softness due to the Omicron coronavirus variant in January and February. Southwest said it expects a net loss in the first quarter, but said the month of March would be “solidly profitable” due to improving revenue and fuel hedging gains.
While I understand the rally today–it is exactly the move I was expecting when I added Delta Air Lines to my Jubak Picks Portfolio on January 31 (the shares are down 12.17% from then as of the close today, March 15)–I think an airline rally gets tricker in the months ahead. I think today’s drop in oil is likely to be followed by a move higher. Inflation is cutting into the buying power of consumers to purchase air tickets (especially if the airlines decide to raise prices to cover part of the increase in the price of jet fuel). And the recession that looms in the second half of 2022 or in 2023 would likely cut into travel plans.
My take is that airline stocks do continue to move higher from here but I’d certainly be looking for an exit after the summer travel season–and the big improvement in traffic likely from the Pandemic levels of 2020 and 2021.
