The Airline Business Is Booming, But Airline Stocks Aren’t… (Here’s How We Can Profit)

As a frequent flyer, I have become well acquainted with the concourses at Dallas Fort Worth (DFW) airport. My travels have taken me there dozens of times, providing ample time to explore the labyrinthian structure, which comprises 17,000 acres – 34 times the size of Disneyland, with lines to match.

The massive complex has 168 gates, and more eateries and retail shops than some mid-sized cities. DFW has its own zip code, fire department, and police station. Some 200,000 inbound or outbound passengers pass through the facility on any given day.

That number plunged below 15,000 (8% of normal) during the height of pandemic lockdowns and social restrictions, turning the normally bustling facility into an eerie ghost town. But those days are over. During my last trip, the airport seemed busier than ever, and the numbers bear that assessment.

This past summer, DFW traffic averaged around 250,000 people per day, peaking on June 30 at 281,000 – the most in the in airport’s 50-year history. And it hasn’t slowed much since then. The facility welcomed 7,249,850 passengers during August, bringing the total volume over the past 12 months to 79.2 million. That’s a healthy increase of 11% from 71.2 million a year ago.

As the world’s second busiest airport, DFW has the infrastructure to handle these kinds of crowds. Still, management has an eye on the future. There are $4.8 billion in expansion projects currently underway (including a brand new Terminal) to eventually accommodate as many as 100 million annual passengers.

Source: Statista

Air Traffic Is Up Nationwide

But this isn’t really about DFW. It’s just one of many hubs around the country reporting record-high traffic.

What does the national picture look like? Well, figures from the Department of Transportation show that U.S. airlines carried 853 million passengers in 2022, up from 658 million in 2021. That’s an increase of 30% or nearly 200 million fliers. And 2023 is shaping up to be even stronger.

In fact, April, May, June, July, and August all set new records for monthly enplanements (the number of people boarding domestic and international flights). Each saw volume running about 8% ahead of last year’s pace. So, if that pattern holds, then roughly 920 million passengers will board flights in 2023.

Of course, more travelers mean more daily departures. According to the latest consumer air travel report, U.S. airlines have been operating about 600,000 commercial flights per month. That equals 103% of the flight volume from a year ago.

Source: U.S. Bureau of Transportation Statistics

Business Is Booming…

I’ll spare you the lost baggage and on-time-arrival statistics. While passengers still grumble about legroom and meal quality (some things never change), it’s safe to say that air travel is back.

You’d think that the sharp increase in traffic numbers would bring stronger profits to the major carriers and the no-frills discounters – and indeed, they have.

American Airlines (NYSE: AAL) operated 500,000 flights in the second quarter, with relatively few empty seats (86% load factor). The company generated record quarterly revenue of $14.1 billion and more than doubled earnings to $1.88 per share. With profits returning, the company has cleaned up the balance sheet and erased $9.4 billion in debt since 2021.

Meanwhile, Delta’s (NYSE: DAL) revenues jumped 19% over the same time frame to reach $14.6 billion. And with operating margins expanding to 17%, operating profits swelled to $2.5 billion – a new record. Citing “robust” demand for air travel, the company raised its full-year earnings outlook to between $6 and $7 per share.

JetBlue Airways (Nasdaq: JBLU) used the same word, “robust,” in describing its record second-quarter revenues of $2.6 billion. Some of the credit goes to a sharp increase in available seat miles (ASMs) following new transatlantic routes and introducing service to Caribbean destinations such as St. Kitts.

Airline Stocks Are Losing Altitude

You may have lost count of the number of times I’ve used the word “record”. So, it stands to reason that this sector delivered nice gains to shareholders through the year’s first half. As a group, they delivered market-beating average returns of about 25% through June.

But as you can see from the performance of the US Global Jets ETF (NYSE: JETS), those gains have since evaporated. If you’ll pardon the pun, this high-flying sector has been losing altitude. The fund (which tracks the performance of airlines, airport operators, manufacturers, and booking agencies) now shows a loss for the year.

An index of the largest U.S. airlines has now lost ground for seven consecutive weeks – the longest losing streak since 2021.

Take Delta. After soaring to nearly $50 in July, the stock has descended back to a recent close of $31.41. Let’s put that in perspective. I added DAL to my High-Yield Investing portfolio at $33.71 in March 2020 – when the pandemic was raging, and non-essential travel would soon be banned.

I jumped the gun a little on the recommendation and probably should have waited a few months. Still, Delta is being valued for less today than it was during the worst of the Covid panic. I’d call that an overreaction.

What’s Going On

So, what is the market overreacting to? Well, labor disputes with pilots and flight attendant unions have caused some concern. There was even talk of a potential strike. But most of these squabbles have been peacefully resolved at this point.

The bigger concern is the run-up in crude oil and subsequent jet fuel price surges. Aviation fuel spiked 37% between May and August and remains elevated. Nearly every major (and minor) carrier has recently reduced their earnings outlook due to rising fill-up costs. To make matters worse, the timing coincides with a softening in booking trends after a busy summer – a double whammy.

While burdensome, the higher fuel tabs are fully reflected in share prices at this point. Keep in mind today’s fleets are more fuel-efficient than ever. Plus, many airlines have sophisticated hedging programs to protect against this scenario. Volatile fuel prices can moderate just as quickly as they shoot up. Until then, these hedging insurance policies will help limit the financial damage.

How We Can Profit

Turbulent now, the airlines could have the wind at their backs for the next several years.

If you are a short-term trader, there are probably better places right now. But opportunistic investors who look for temporary events that open rare windows to buy outstanding business at deep discounts may find that this is the time to act.

In the meantime, if you want to know about my absolute favorite high-yield picks, you need to check out my latest report…

You’ll learn about 12 ultra-generous dividend payers that put more money in your pocket. And the best part? They pay dividends monthly. Go here to learn more now.