What happened
Investors were looking to sell in June, with the S&P 500 trading down more than 8.3% for the month due to fears that inflation would lead to slower economic growth.
Airlines did much worse than the broader markets. Shares of Delta Air Lines (DAL 0.36%) fell 30% in June, according to data provided by S&P Global Market Intelligence, and shares of American Airlines Group (AAL -0.41%), United Airlines Holdings (UAL 0.35%), and Southwest Airlines (LUV -0.43%) all dropped more than 20% on fears that travel demand will not hold up during difficult economic times.
So what
Airline investors have had a lot to worry about in recent years. The industry saw revenue fall to near zero during the height of the pandemic when travel demand basically evaporated. This was supposed to be a year of recovery for the industry thanks to strong pent-up demand for vacations, but 2022 has turned out a lot more complicated than anyone had imagined.
Inflation, and particular higher fuel and labor costs, have eaten into profit margins, meaning that all that extra summer revenue has only served to offset higher expenses and has not hit the bottom line. But what really has investors worried is the impact inflation will have on consumers.
If higher prices are eating into household budgets, that leaves less money for big-ticket discretionary purchases like airline tickets. The planes are packed right now, full of travelers who, by and large, bought tickets months ago before inflation was front of mind. The question weighing on airlines right now is whether that demand will hold up in the second half of the year, especially after Labor Day when leisure traffic tends to die down.
Ironically, while fears about the future are about empty planes, the airlines are also facing headaches due to packed planes right now. Delta early in June cut about 100 flights per day from its schedule and announced in late June it would waive fees usually associated with flight changes, to try to ease potential network congestion over the Fourth of July weekend.
The airlines are facing a shortage of pilots that is limiting their ability to maximize revenue while demand is strong. If we are indeed heading toward a period where demand softens, the industry will lament its inability to fully capitalize when people wanted to fly.
Now what
The good news is the airlines are far more resilient today than they were through past downturns, meaning these carriers can weather tough times. And the first half of the summer has provided proof that there is ample demand for flights. New pilots are being trained, and cost issues will likely subside over time. For those with enough patience, there is still reason to believe in the airline sector.
Better times, however, appear to be a long way off. With corporate travel still not back to pre-pandemic levels, and likely to be just as sluggish if the economy is under pressure, and international demand still lagging, it could be the second half of this decade before airline stocks are able to soar.
For those with a long time horizon, Delta is an intriguing "buy" today given its recent history of innovation and its strong international alliance structure. But for all of the carriers, investors boarding today can expect a long wait before takeoff.
Given the uncertainty, and how long it is likely to take to complete the recovery, it's no wonder investors in June decided to head for the exits.
