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Why Airline Stocks Are Gaining Altitude Today

Motley Fool - Tue May 17, 12:30PM CDT

What happened

United Airlines Holdings(NASDAQ: UAL) raised its outlook for the current quarter, and it is giving a lift to the entire airline sector. Shares of United and JetBlue Airways(NASDAQ: JBLU) traded up as much as 7% by midday Tuesday, while shares of American Airlines Group(NASDAQ: AAL), Delta Air Lines(NYSE: DAL), Alaska Air Group (NYSE: ALK), Hawaiian Holdings(NASDAQ: HA), and Brazilian airline Azul(NYSE: AZUL) were all up 5% or more.

So what

Airline investors are on pins and needles watching to see if high fuel prices, inflation, and other issues will disrupt what is expected to be a strong summer travel season. The airlines had hoped to use 2022 to recoup some of the losses from 2020, when the pandemic reduced travel demand to near-zero and forced airlines to take on loans to stay airborne.

View through the window of an airport lounge.

Image source: Getty Images.

United provided a boost to the industry in an after-hours Monday regulatory filing. The airline raised its passenger revenue outlook due to what it called a strong demand environment. United now expects total revenue per available seat mile, a standard industry metric, to be up 23% to 25% compared to the same period of 2019, prior to the pandemic. That's up from United's previous guidance of up 17%.

United also said it is raising its capacity outlook slightly, and did warn that costs are likely to come in slightly higher than expected due to higher oil prices. But the overall message is that ticket demand is holding steady, and giving the industry pricing power. United held its adjusted operating margin guidance steady at 10%, an indication that it has been able to offset fuel costs with higher ticket prices.

"In the period following the company's previous guidance, the demand environment has continued to improve, resulting in a higher unit revenue outlook for the second quarter 2022," United said. "The price of oil has also continued to increase, resulting in a higher expected fuel price for the second quarter 2022."

Now what

Although the guidance is company-specific, it isn't hard to apply what United said to the broader industry. For all of the talk of what inflation might do to consumer confidence, it has apparently not yet caused a change in vacation plans.

The real question now is what happens to demand when the summer is over. Businesses are gradually reopening, and as they do it should mean some sort of rebound in corporate travel. But international and business demand is still likely to lag domestic for the next year or more, limiting the upside to airline revenue growth.

The good news is a strong summer season should give the airlines the wherewithal to withstand any additional headwinds, be it a new wave of the pandemic, or a recession. The bad news is that there are likely limits to how high this sector can go with such uncertainty still lingering. For those who want to buy in, steady performers like Delta and Southwest Airlines are the top picks.

The airlines are enjoying strong gains on a day when the markets are up and investors are hoping for the best, but given the way the last few years have gone there is no reason to believe the turbulence is gone for good.

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Lou Whiteman has positions in Delta Air Lines. The Motley Fool recommends Alaska Air Group, Delta Air Lines, Hawaiian Holdings, JetBlue Airways, and Southwest Airlines. The Motley Fool has a disclosure policy.