Airline Stocks Struggle to Find Good News

Earnings Season Fails to Lift Airlines

United Airlines (UAL) is set to report its earnings on Tuesday, following Delta Air Lines (DAL) last week. American Airlines (AAL) will also be sharing their results on Thursday. While these three carriers are expected to perform relatively well due to their international exposure and less reliance on weakening domestic demand, it remains uncertain whether this will translate into stock market gains.

Despite Delta’s solid earnings, the airline’s shares actually plunged over 5% in the two days following the report. Delta exceeded earnings expectations, achieved record third-quarter revenue, and noted that strong travel demand was expected to continue into the December quarter. Furthermore, business travel has been steadily improving, and trans-Atlantic revenue experienced an impressive 34% growth, reaching the highest revenue per available seat mile in the company’s history.

However, even these positive outcomes were not enough to boost Delta’s shares, which have now experienced a 30% decline since their peak in July. Factors such as higher jet fuel prices during the third quarter and rising oil prices due to the Israel-Hamas conflict have been exerting additional pressure on airline stocks.

With Delta’s earnings disappointment fresh in investors’ minds, United Airlines also faces a challenging task in attempting to lift its shares after reporting its own earnings.

United Airlines Facing High Expectations for Full-Year Earnings

Analysts have projected adjusted earnings per share (EPS) of $3.38 on revenue of $14.4 billion for United Airlines. However, surpassing these estimates may not be sufficient. Investors are particularly interested in United’s full-year earnings guidance, especially in light of Delta’s recent reduction in its 2023 outlook. Delta now forecasts an EPS range of $6 to $6.25, down from the previous $6 to $7 range.

United Airlines has set its current guidance at $11 to $12 per share, but analysts are already doubtful. The consensus, according to FactSet, stands at $9.96.

While larger carriers struggle to boost their shares with strong profits, record revenue, and indications of robust demand, low-cost airlines such as JetBlue Airways (JBLU), Spirit Airlines (SAVE), and Frontier Airlines (ULCC) are expected to face losses.

Christopher Raite, an analyst at Third Bridge, stated that the tides have turned for U.S. carriers. Low-cost airlines heavily reliant on domestic leisure travel are finding it challenging to maintain profitability levels, while network carriers with international exposure continue to exhibit significant profit growth.

J.P. Morgan’s Jamie Baker warned that there may be more difficulties ahead for low-cost airlines. In a recent note, he highlighted that any U.S. airline failing to achieve third-quarter profitability (SAVE, ULCC, JBLU) must take meaningful corrective measures. Failing to do so could result in further depreciation of their equity value.

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