Airline stocks tumble as economic concerns overshadow travel surge

Packed planes. Sky-high airfare. An end to Covid testing for international arrivals. So much is going in airlines’ favor these days — except their share prices.

The sector’s latest drop is surpassing a broad market swoon as investors weigh the chances of a recession and just how aggressive the Federal Reserve will get to tamp down the sharpest increase in consumer prices since the early 1980s.

American Airlines dropped 8.6% on Thursday, hitting the lowest price since November 2020. Southwest Airlines fell 6%, hitting a nearly two-year low. Delta Air Lines and United Airlines each shed more than 7%, while the NYSE Arca Airline Index, which tracks 18 carriers, lost more than 8%.

On Wednesday, the Federal Reserve lifted interest rates by three-quarters of percentage point, the biggest increase since 1994, in an effort to tame inflation.

“If you’ve flown on a plane lately, planes are very full and plane tickets are very expensive,” Federal Reserve Chairman Jerome Powell said Wednesday.

Strong travel demand following more than two years of the Covid-19 pandemic has been a boon to airlines, with Delta, United and American recently forecasting a return to profitability. Carriers’ executives have said travelers have been digesting higher fares.

Airlines have been supply constrained. Delta, JetBlue Airways, Spirit Airlines, Alaska Airlines and others have cut summer flying plans to give themselves more wiggle room for routine disruptions and in some cases to address labor shortfalls.

Airline CEOs will meet virtually with Transportation Secretary Pete Buttigieg late Thursday to discuss how prepared they are after a surge in delays and cancellations this year, according to people familiar with matter.

There are some signs that the travel boom could begin to cool, albeit from high levels. Fare-tracker Hopper on Wednesday said domestic airfare fell for the first time this year, with round trips going for $390, down from $410 in mid-May. It said this was in line with usual seasonal trends.

Start-up U.S. airline Avelo on Thursday said it was cutting its fares 50% to all 25 destinations “to help provide some inflation relief for folks during these uncertain times.” 

What will be key for airlines going forward is demand after the summer travel surge, when business travel usually picks up. Business owners worried about a recession and in some cases even announcing layoffs could scale back plans for travel.

“The market is just reacting to anything that’s cyclical, anything that’s considered sensitive to the economy,” said Savanthi Syth, airline equity analyst at Raymond James. “As frustrating as it is to watch the stocks … we are going into this recession like we’ve never gone into one before.”

She pointed to strong, pent-up demand from the pandemic, stronger consumer savings and airlines’ buildup of liquidity during the pandemic, meaning they won’t have to load up their balance sheets with expensive debt.