Shares of global airline stocks advanced more than 12 percent during the week ended Jan. 13, indicating that investors were unfazed by the service outage that temporarily grounded planes in the United States. United Airlines was the best performer for the week, up 22 percent, followed by American Airlines (20 percent) and Frontier Airlines (17 percent).
For the one-month, three-month and six-month periods, a basket of global airline stocks has significantly outperformed the market. Since the middle of October, the NYSE Arca Global Airline Index soared more than 22 percent compared with the S&P 500, which gained 11 percent.
Much of the recent increase has been driven by China’s decision to lift quarantining requirements for incoming travelers for the first time since the start of the pandemic. Airline bookings in China have exploded as a result.
But regional air travel demand was expanding even before China’s announcement. The Association of Asia Pacific Airlines (AAPA) reported 13.4 million international passengers were carried by Asian airlines in November 2022, a phenomenal 663 percent increase from the same month a year earlier. Based on revenue passenger kilometers (RPKs), demand rose nearly 500 percent in the 12-month period through the end of November.
There are other drivers to the stock rally.
OPTIMISM FROM EARNINGS
It’s earnings season, and so far, only Delta Air Lines has reported fourth-quarter and full-year profits. Although profits were dented somewhat from higher expenses and debt-servicing, the Atlanta-based carrier made great progress toward reaching and surpassing 2019 levels. In the fourth quarter, net income was $828 million, still 25 percent away from the $1.1 billion that was generated three years earlier. However, operating cash flow came in at $1.2 billion for the quarter, $220 million more than was reported for the period in 2019.
It was American’s recent statement that really excited investors. The carrier said that its fourth-quarter profit will be double analyst expectations, and revenue will also beat, thanks to a strong holiday travel season. Preliminary filings show that fourth-quarter revenues were as much as 17 percent more than those generated during the year-ago period, against expectation of a 12 percent increase.
INVESTING RECORD AMOUNTS
We like when a company invests in itself, whether that means building a new facility or putting in new orders. It tells me executives are optimistic about the future and are positioning the company for growth.
We’re seeing airlines do just that right now. According to Airlines for America, U.S. carriers are investing a record amount on things such as aircraft, equipment, airport construction, information technology and more. In 2022, capital expenditures were estimated at $21.2 billion; this year, they’re forecast to hit $27.0 billion, which would be a record.
Both Airbus and Boeing reported strong delivery and new orders numbers for 2022. Since the tragic events involving Boeing’s 737 MAX in 2019, the Arlington, Va.-based company has been playing catchup to its main rival, and for the fourth straight year, Airbus topped its U.S. competitor. Airbus delivered 661 jets and won 820 new orders during 2022, against Boeing’s 480 jets delivered and 774 new orders.
United Airlines was responsible for putting in one of the largest orders I’ve ever seen. In the “largest widebody order by a U.S. carrier in commercial aviation history,” the company announced in December it ordered 100 Boeing 787 Dreamliners with an option to purchase 100 more. What’s more, United says it continues its “unprecedented effort to upgrade the interiors of its existing fleet.”
BUSINESS TRAVEL RECOVERY
What a lot of investors are waiting for is a sign that business travel has fully bounced back. According to data from ticket transactions settlement firm Airlines Reporting Corp., leisure travel has safely returned to 2019 levels, whereas business travel continues to trail. Of course, that may just mean there’s great upside potential.
A recent report from Morgan Stanley suggests businesses are ready to start spending on corporate travel again. Based on a survey of 100 global corporate travel managers, travel budgets are expected to be 98 percent of 2019 levels on average. Smaller companies are leading demand, Morgan Stanley says, with nearly two-thirds of them saying they believe travel budgets will increase this year compared with 2022.
Frank Holmes is CEO and CIO of U.S. Global Investors. The original version of this story appeared on the U.S. Global Investors’ website. Read it here.