Airline profits are expected to rise to US$30.5 billion in 2024, but there’s a sticky problem: margins
Author of the article:
Bloomberg News
Peyton Forte
Published Jul 16, 2024 • 3 minute read
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Travellers wait in line to check in at Los Angeles International Airport.Photo by FREDERIC J. BROWN/AFP via Getty Images files
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Americans are flying in record numbers as the summer travel season kicks into gear, but traders are betting that airlines won’t be able to capitalize on it.
Short interest in the US$1.1-billion aviation industry exchange-traded fund US Global Jets (JETS) accounts for more than 27 per cent of the ETF’s free float after touching 30 per cent earlier this month, the highest in data going back to 2019, according to S3 Partners LLC.
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The lack of faith makes sense based on the performance of airline stocks. JETS was down 12.45 per cent over the past 12 months as of Monday, and the nine-member S&P supercomposite airlines index has plunged 19.7 per cent, compared with a 24.5 per cent surge in the S&P 500 index. Air Canada‘s stock was down 31.4 per cent in the same timeframe.
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Meanwhile, air travel is booming. Carriers in the United States are projected to transport a record 271 million passengers from June 1 to Aug. 31, representing a 6.3 per cent jump from the same period last year, according to industry trade group Airlines for America.
Globally, airline profits are expected to rise to US$30.5 billion in 2024, based on projections from the International Air Transport Association, which recently lifted its outlook from the US$25.7 billion it estimated back in December.
So what’s the problem for airlines? In a word: margins.
Shortages of pilots and cabin crew have forced carriers to increase wages to attract talent. Air traffic control constraints have led to costly disruptions. And airlines are finding that their growth plans were overly ambitious, leading to an abundant supply of available seats and cut-rate promotions to fill planes. Meaning, many of the passengers flooding airports right now are boarding at cheaper prices.
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“Just because TSA says there’s a heck of a lot of people going through security, that doesn’t mean that we’ve got an industry that’s killing it,” George Ferguson, a Bloomberg Intelligence analyst, said. “If I were an investor, I would want record profits, too — and from a margin perspective, we don’t have that.”
Delta Air Lines Inc. kicked off airline earnings on Thursday, delivering a warning that profit in the third quarter will fall short of expectations as heavy competition in the domestic market drives airfares down. Shares of the Atlanta-based carrier fell 8.2 four per cent since then. The stock has climbed 6.3 per cent so far this year, making it one of the best performers in the S&P airline index.
Delta’s weak outlook adds more uncertainty to a sector that’s already been sounding alarms on corporate guidance. Southwest Airlines Co. dialed back its revenue outlook for the second quarter late last month amid pressure from activist Elliott Investment Management LP to overhaul its leadership, and American Airlines Group Inc. cut its profit forecast in May.
The pain is most intense for low-cost carriers. Shares of Frontier Group Holdings Inc. are down 19.6 per cent this year, while Spirit Airlines Inc.’s stock has lost 81.2 per cent in 2024 and is trading near all-time lows. In just the past few days, two of the 13 Wall Street analysts who cover Spirit — Raymond James Financial Inc.’s Savanthi Syth and Deutsche Bank AG’s Michael Linenberg — cut the stock to sell-equivalent ratings.
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As a result, investors are fleeing JETS, withdrawing more than US$589 million from the ETF this year and dragging its assets down to the lowest level in four years, according to data compiled by Bloomberg.
Many airlines are now taking steps to curb supply by dropping underperforming routes and putting off delivery of new planes as Boeing Co. continues to struggle with production and manufacturing issues. Airbus SE cited persistent supply chain issues when it cut a slew of longer-term goals last month, adding to a shortfall in new jets. Many U.S. airlines are expected to end the year with smaller fleets, suggesting a much more balanced supply in the coming quarters.
In the meantime, carriers are expected to continue to struggle.
“Multiples for the airlines have been really, really depressed,” Sheila Kahyaoglu, a research analyst at Jefferies Group LLC, said. “What we’re seeing is that a lot of long-only investors still don’t have much appetite to return to the space.”