Airlines rise on optimism travellers returning to skies

Bloomberg

Airline stocks recorded their first back-to back weekly gains gain since early October, potentially marking the beginning of a long-overdue recovery, amid growing signs that a reopening of the economy is gaining pace.
The S&P Supercomposite Airlines Industry Index closed up 6.1%, after a 3% gain, as
investors continue to shun higher-risk growth stocks given expectations for aggressive interest-rate hikes.
At the same time, many states have announced plans to loosen Covid-related restrictions, and results from MGM Resorts International and Walt Disney Co suggest travel demand may be returning. A deal between low-cost carriers Frontier Group Holdings Inc and Spirit Airlines Inc also boosted sentiment.
Yet the horizon is far from clear for airlines. Just as the threat from Covid-19’s newer variants seem to be dissipating, the steady surge in the price of oil could squeeze profits. For now, investors appear more
focused on carriers’ ability to fill seats.
“Demand recovering is the key part of the equation right now,” Fiona Cincotta, senior financial markets analyst at City Index, said in an email. “While high oil prices are definitely a consideration, the fact that customers are ready to fly again is offsetting those fears for now.”
Jet fuel typically comprises 20% to 25% of airlines’ annual operating expenses, according to Bloomberg Intelligence data. Also, most US airlines don’t hedge against oil price fluctuations. Only Alaska Air Group Inc and Southwest Airlines Co have some hedges in place, according to BI analyst George Ferguson.
“The last time oil was at $100, the airlines were really quite profitable,” Cowen Inc analyst Helane Becker said, noting that while margins will be squeezed, there are ways to manage that.
“The airlines will reduce capacity and raise fares, which would cover the higher labour and oil prices.”
All but one of the nine members of the airline index closed up for the week, with the biggest gains coming from United Airlines Holdings Inc, SkyWest Inc, Hawaiian Holdings Inc and American Airlines Group Inc — which are also among the biggest decliners in the group compared to pre-pandemic levels. The index itself is trading about 30% below the levels touched in mid-February of 2020, while the S&P 500 has climbed 31% over the same period.
As vaccines continue to roll out and restrictions ease, “pent-up demand for flying could mean that 2022 will be a strong year for the airlines, potentially taking share prices back to pre-pandemic levels,” City Index’s Cincotta said.