Why Airline Shares Are Hovering Regardless of Rising Disruptions

Travelers are seen ahead of the July 4th bank holiday weekend at Hartsfield-Jackson Atlanta International Airport on June 30, 2023 in Atlanta, Georgia.

Elijah Nouvelage | AFP | Getty Images

Ahead of the Fourth of July weekend, flight disruptions were piling up at airports across the country, but airline investors have largely ignored them.

More than 63,000 flights operated by US airlines, or 30% of their schedules, were delayed between June 24 and July 2. More than 9,000 or 4.2% were cancelled. Both percentages are above the disruption average so far this year, according to flight tracking site FlightAware.

Disruptions eased on Tuesday with nearly 2,500 delays to U.S. flights, half as many as Monday, although thunderstorms continued to disrupt flights at major airports like Newark and Denver.

The recent delays were largely due to a series of rolling storms coupled with other issues such as a shortage of air traffic controllers in the congested airspace around New York and other areas, shattering the travel plans of thousands of customers. It turned the mostly quiet spring for travelers upside down.

But the enormously high demand for travel continues to keep airline stocks high. with several multi-year highs.

The Transportation Security Administration said it screened nearly 2.9 million people Sunday, a record for a single day. This is the clearest sign yet of continued demand for air travel as passengers book flights or redeem rewards points and make up for lost time after the Covid pandemic halted travel.

A Delta Airlines and American Airlines plane is seen ahead of the July 4th holiday at Ronald Reagan Washington National Airport on July 1, 2023 in Arlington, Virginia.

Stefanie Reynolds | AFP | Getty Images

American Airlines And Delta Airlines have recently raised their earnings prospects thanks to strong bookings. Last year’s lower fuel prices also continue to give the industry a tailwind.

The airlines are releasing second-quarter results and will provide an outlook for the full summer from mid-July. The reports are also expected to include the financial impact of the disruptions in late June and early July.

Airline stocks are rising

The stock gains of the major US airlines have far outpaced the broader market this year.

United Airlines and Delta are each up 46% this year through Monday, while American Airlines is up 42%. For comparison: the S&P 500 has increased by 16% in the same period. Delta and United recently hit their highest levels since June 2021.

Southwest Airlineswhose meltdown at the end of 2022 resulted in a first-quarter loss is up 10% this year.

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The NYSE Arca Airline Index, which tracks mostly U.S. airlines, is up 51% year-to-date through Monday, beating the 16% gain in the S&P 500.

Even over the past week, as travel chaos impacted operations, many airline stocks outperformed the S&P 500, with the exception of United Airlines. Shares fell 1.7% as the airline struggled to stabilize operations amid severe weather conditions at its hub at Newark Liberty International Airport.

Southwest Airlines planes are seen past travelers ahead of the July 4th holiday at Ronald Reagan Washington National Airport in Arlington, Virginia July 1, 2023.

Stefanie Reynolds | AFP | Getty Images

According to FlightAware, from June 24 to July 2, United had the largest share of delays among US airlines, accounting for 42% of its main flight schedule.

snowball effect

The Federal Aviation Administration cut the Newark departure rate early last week, which has caused a series of delays, CEO Scott Kirby said. When planes are unable to depart, there is no parking for incoming flights, so it’s easy to experience disruption.

“Airlines, including United, are simply not designed to have their largest hub severely restricted for four days and still operate successfully,” Kirby said in a note to employees over the weekend.

He said the airline must reduce its Newark schedule, particularly during the spring and summer thunderstorm season, to avoid pile-ups unless the airport has more capacity.

Thunderstorms are difficult for airlines because they can occur without warning and are more difficult to predict than other types of weather such as hurricanes or winter storms.

Airlines often delay their flights to wait for the storm to clear and airspace to clear, rather than canceling them. However, crews are able to meet government mandated work days, causing further disruption.

David Neeleman, Founder and former CEO of JetBlue Airways and CEO of Breeze Airways, said there’s not much an airline can do when airline arrival rates are slashed that much.

Airlines could proactively cancel just to clear up the weather, he said.

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