Airline stocks recorded their first back-to-back weekly gains since early October, potentially marking the beginning of a long-overdue recovery, amid growing signs that a reopening of the economy is gaining pace.
The S&P Supercomposite Airlines Industry Index closed up 6.1 per cent this week, after a 3 per cent gain last week, as investors continue to shun higher-risk growth stocks given expectations for aggressive interest-rate hikes.
At the same time, many states have announced plans to loosen Covid-related restrictions, and results from MGM Resorts International and Walt Disney suggest travel demand may be returning. A deal between low-cost carriers Frontier Group Holdings and Spirit Airlines also boosted sentiment.
Yet the horizon is far from clear for airlines. Just as the threat from Covid-19’s newer variants seems to be dissipating, the steady surge in the price of oil could squeeze profits. For now, investors appear more focused on carriers’ ability to fill seats.
“Demand recovering is the key part of the equation right now,” Fiona Cincotta, senior financial markets analyst at City Index, said in an email. “While high oil prices are definitely a consideration, the fact that customers are ready to fly again is offsetting those fears for now.”
Jet fuel typically comprises 20 per cent to 25 per cent of airlines’ annual operating expenses, according to Bloomberg Intelligence data. Also, most US airlines don’t hedge against oil price fluctuations. Only Alaska Air Group and Southwest Airlines have some hedges in place, according to BI analyst George Ferguson.
“The last time oil was at $100, the airlines were really quite profitable,” Cowen analyst Helane Becker said, noting that while margins will be squeezed, there are ways to manage that. “The airlines will reduce capacity and raise fares, which would cover the higher labour and oil prices.”
All but one of the nine members of the airline index closed up for the week, with the biggest gains coming from United Airlines Holdings, SkyWest, Hawaiian Holdings and American Airlines Group, which are also among the biggest decliners in the group compared to pre-pandemic levels.
The index itself is trading about 30 per cent below the levels touched in mid-February of 2020, while the S&P 500 has climbed 31 per cent over the same period.
As vaccines continue to roll out and restrictions ease, “pent-up demand for flying could mean that 2022 will be a strong year for the airlines, potentially taking share prices back to pre-pandemic levels,” Ms Cincotta said.