This is a great time to be an airline — a marked contrast to the doom-and-gloom environment of the Covid pandemic’s early days.
Fare prices are blasting higher, and consumers are happy to pay them after being stuck at home for much of the pandemic.
American Airlines (AAL) – Get American Airlines Group, Inc. Report, Delta Air Lines (DAL) – Get Delta Air Lines, Inc. Report and Alaska Airlines (ALK) – Get Alaska Air Group, Inc. Report posted record revenue in the first quarter, and United Airlines (UAL) – Get United Airlines Holdings, Inc. Report expects to hit an all-time high this quarter. Airline executives say demand is as strong as they’ve ever seen.
The key areas of corporate and international travel are making comebacks, and the share prices for airlines are soaring. American has gained 9% this week, Delta 6% and United 19%.
Jet fuel prices are surging, more than doubling over the past year. But so far airlines have been able to raise their fares to help cover the increase without pushing passengers away.
Absorbing the Influx
The only question mark for airlines seems to be whether they can handle the onslaught of returning passengers. The companies cut workers early in the pandemic and are rushing to hire now.
As of February, none of the major airlines had replenished their staffs to the numbers prevailing before the pandemic, according to federal data cited by the New York Times.
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Airlines also are dependent on there being enough air traffic controllers, security personnel and fuel sellers, The Times noted.
“The whole infrastructure is not set up to snap back to these rapid growth rates,” United Chief Executive Scott Kirby said in the company’s earnings call.
As for the stocks, J.P. Morgan analyst Jamie Baker has upgraded United to overweight from underweight and American to neutral from underweight.
He raised his share-price target for United to $76 from $60 and for American to $26 from $18. United recently traded at $52.71 and American at $20.48.
Stocks aren’t Overvalued
While airline stocks have soared 60% from “lows achieved when demand trends were grossly misunderstood, year-to-date gains are inside of 20%, and the sector still rests 20% below 2021 highs,” Baker said.
“Aside from fuel and geopolitical pressures, almost every fundamental input is stronger than last year (supply, demand, Covid, you name it),” he said.
Still, American, Delta and United all trade at nine times estimated earnings for 2023.
“History suggests we’re nowhere near the point of demand destruction,” Baker said. “It’s easy to complain about airfares when compared to some of the bargains witnessed during Covid’s pandemic phase. But that’s never how we calibrated our models.”