US Airlines Prospects Appear Rosy

The Covid-19 Delta variant took the world by storm. As a result, we are experiencing a more contagious variant contributing to several travel restrictions abroad and locally in several developed economies. This is a worrying sign as cyclical stocks are pushing ahead for more gains on the backdrop of pent-up demand in a post-pandemic world.

In this episode, we will explore the Airline sector, a vital pillar of the aviation and employment outlook in the US. So let’s roll on that.

A look at American Airlines (AAL)

Based on the latest earning results, US airlines had a splendid comeback. Take American Airlines Group (AAL), which exceeded estimates for both revenue and earnings in the quarter. The expected adjusted loss was $2.03 per share, but it registered a better result of $1.69 per share. With the federal payroll support and tax credits, AAL turned into a profit of $19 million, a 3 cents per share.

It is also shifting gear to the pre-pandemic capacity. As a result, it is expected to fly by about 90% of its domestic seat capacity and roughly 80% of its international segment this summer. Nonetheless, its route to pretax profits might take longer than its legacy competitors, United Airlines (UAL) and Delta Air Lines (DAL), as AAL has a considerable debt load. Despite having plans to pay down these debts, as an article notes, it continued to be a burden on its balance sheet in the near term.

A Stronger Balance Sheet in Southwest Airlines (LUV)

On the other spectrum, LUV appears to have the most robust balance sheet among the carriers. It has substantial exposure to domestic leisure travel, which is one of Pika World’s favourites. With a healthy financial situation and riding on the tailwind of domestic travel, it should see a joy of profits in the reopening economy.

The recent quarter result was less pleasing. Although revenue hits expectation, the earnings per share disappointed investors as jet fuel prices drag the bottom line. Nonetheless, with healthy ticket booking trends and that leisure traffic had rebounded above 2019 levels on a decent fare level, LUV can have a definite trend ahead.

It is with sunshine in a cloudy sky

Challenges are always plenty and surface when investors least expect them. At Pika World, we do have some concerns about the sector despite our generally optimistic outlook. First, jet fuel prices have risen sharply in the past months, which is eating into operating profit. Second, the fall travel season also sees seasonally weak leisure demand, and airlines would have to see substantial corporate travel to exceeds Wall Street’s rising targets.

Next, as our opening suggests, Delta variant is showing its teeth that could likely moderate travel momentum or even stall the growth if travel restrictions are put in place. Unfortunately, despite Europe’s reopening of borders to US Citizens, President Biden is less willing to lift travel restrictions for visitors from Europe, including major Asian economies such as China and India.

The 2H2021 trading and investing journey will face many bumps along the way. As we made adjustments in this mid-cycle economic transition, a stroll is perhaps a wiser pace than a sprint.

Have the best of the day.