Delta Air Lines (DAL), United Airlines (UAL), and American Airlines (AAL) are moving higher in 2024, all three seeing year-to-date gains. TD Cowen Managing Director Helane Becker and Citi Managing Director Steve Trent weigh in on the strength of airline operators amid 2024 travel forecasts.
While stating incentives like customer loyalty programs can drive revenues, Trent believes airline stock prices could see some moderation: "It's possible that we won't see them as high as they've been over the last year and a half, but a fair bit of that is coming down to oil prices. We did, of course, have a lot of pressure from jet fuel prices, 2022 and into 2023. So some of that moderation should be related to fuel. When we think about this from an ex-fuel perspective, we do think there should be stability, even some upside in fares..."
"Our hope is that the government doesn't shut down because the FAA reauthorization expires March 8 — it was punted to early March which is just two weeks away...," Becker says on oversight concerns tied to the airline industry. "We just need to have continuity in that regard because if we don't, air travel is going to get worse than it already is. I don't think anybody would give airlines really high marks for the service that they deliver..."
Catch more of Yahoo Finance's Travel Guide 2024: Industry Insights special coverage this week, or watch this full episode of Yahoo Finance Live here.
Editor's note: This article was written by Luke Carberry Mogan.
SEANA SMITH: Airline stocks are taking flight just a bit so far in 2024. We want to take a look at shares of Delta, United, American Airlines all gaining year-to-date. You can see, though, not much of an uplift here since the start of the year. Now as we approach the very busy spring travel season of the year, what stocks are best positioned? Joining us now is part of Yahoo Finance's Travel Guide 2024 Industry Insights. We have Helane Becker, TD Cowen managing director, and Steve Trent, Citi managing director.
Steve, let me start with you. In terms of how airlines are positioned ahead of the rest of the year, from your view, are we going to see more of that recovery take place and who do you think has that lead position?
STEVE TRENT: Yeah, absolutely. And thank you for having me. So I do think that the network airlines look better-positioned. We continue to have generally to very good demand trends not only talking about ticket revenue but all the ancillary stuff they do-- co-branded card, loyalty program revenue. International capillarity is still a very good place to be.
The discount airlines that are mostly US-based, we're a little less sanguine on those in terms of what opportunities we see. But overall, the picture looks good from a capacity perspective. So 2019, we had $23 of US economic activity per available seat mile. We, last year, finished around $28. So the pie itself looks very good. We think the distribution of the economics could be tilted toward the network airlines.
BRAD SMITH: Helane, I want to bring you into this as well. I mean, when you think about the international exposure that airlines need to have in order to be among your top picks, how important is that international demand into this year's performance that trickles through to what investors are going to be watching in the stock price action?
HELANE BECKER: Well, I think, in terms of international received a pretty strong demand. The airlines, though, have adjusted capacity lower since we initially cautioned back in December that we thought airfares, internationally, would come down this summer because capacity was rushing into the market-- and not so much from US carriers but from international carriers that didn't have the ability to add capacity last summer.
So for example, Lufthansa is up 16% this summer versus last year, while United is just reinstating seasonal service and their capacity is actually up low single digits.
SEANA SMITH: Steve, what do you think the pricing power looks like from these airlines, and how much higher some of those airfares could potentially go?
STEVE TRENT: Yeah. So I think, relative to last year or the year before-- relative to 2019-- it's possible that we won't see them as high as they have been over the last year and a half. But a fair bit of that is coming down to oil prices. So we did, of course, have a lot of pressure from jet fuel prices 2022 and into 2023. So some of that moderation should be related to fuel.
But when we think about this from an Xfuel perspective, we do think there should be stability. To even some upside in fares. As Helane mentioned, we do have some capacity constraints. We have the powder metal alloy contamination on GTF engines. Boeing has had some issues. So it's possible that elements of the market won't have as much equipment at the end of the year that they're expecting to have today, and that could support pricing.
BRAD SMITH: Just to follow on that-- does that mean any material reduction in route schedules that the airline operators are flying right now?
STEVE TRENT: Yeah, it could be depending on which ones. I think regional airlines come to mind in terms of where we could continue to see some scarcity of equipment. So yeah. I think, in pockets, yes. And then you also have markets that, over the last three years, have been hot like South Florida where everybody put metal into that market during the pandemic. Now probably, you see some rotation out of those regions.
BRAD SMITH: Helane, one of the things that we've continued to hear from airline CEOs is just when they expect to take delivery of some of these new aircraft and add that into the fleet, how would you be evaluating that and when that could actually be a pass through a boon for some of these businesses as well?
HELANE BECKER: Yeah. The way we think about it is everything slides to the right. So if an airline tells us they're looking to take delivery of 50 or 60 aircraft this year, we probably think we'll be closer to 40 aircraft because the delivery delays, the supply chain issues. And we think that we'll probably see some lease extensions into 2025 to cover some of the gaps because of all the delivery issues that we're seeing in the OEM problems.
And so that's how we think about it. We push everything off to the right, which is really helpful. Our hope is that the government doesn't shut down because the FAA Reauthorization expires March 8. It was punted to early March, which is just two weeks away. And we need-- or next Friday. I guess March 8.
And we just need to have continuity in that regard because if we don't, air travel is going to get worse than it already is. I don't think anybody would give airlines really high marks for the service that they deliver.
And without the support network of the government, air traffic control, even the OEM, the suppliers for maintenance-- without their support, air ticket prices are going a lot higher over time because demand isn't going down and yet, the supply, the number of seats available, is going down or at least is not keeping pace. So we view that as concerning because it will-- eventually, if fares get too high, people will opt out, especially in the domestic market.
SEANA SMITH: I see, we're also getting some developments on the JetBlue-Spirit saga that's playing out yesterday, urging the US appeals court to allow the merger to go forward. What's your assessment of that risk? Or, I guess, is it more of a short-term risk? And how do you see this ultimately impacting the industry at large?
STEVE TRENT: Yeah. Certainly, I think, right now, it's a very difficult time in the aviation industry for any M&A to get done at least over the short term. So we know there's some other stuff out there that's cooking that might be less controversial than what JetBlue is trying to do. But when we look at this particular case-- the business model differences and the government's desire to preserve Maverick pricing carriers for example-- it looks like it's going to be a difficult road.
And possibly, the airline industry could use a little bit of consolidation. So does that come through M&A? Does it come through carriers doing filings or what have you? I hope it's not going to be the latter. But we think, one way or the other, we could see on some level capacity continue to come out of the industry at least over the short term, whether that's M&A, or as Helene mentioned, we get ongoing delays from the OEMs.