Jet fuel prices are soaring, and the turbulence in the airline industry is far from over. Recent warnings from major players in the aviation sector, including United Airlines Holdings (NASDAQ: UAL), Southwest Airlines (NYSE: LUV), and Alaska Air (ALK), have sent shockwaves through the market. In this blog post, we'll take a closer look at how rising jet fuel costs are impacting airlines and what lies ahead for the industry.
Fueling the Concerns
Jet fuel is a significant expense for airlines, often representing one of their largest operational costs. Any fluctuations in its price can have a profound effect on an airline's bottom line. This is precisely what's happening now, as all three major carriers have issued warnings about unexpectedly high jet fuel prices for the current quarter.
Southwest Airlines (LUV) has revised its estimates, projecting economic fuel costs per gallon to range from $2.70 to $2.80. This is a notable increase compared to their earlier forecast of $2.55 to $2.65. The market's reaction was swift, with LUV shares plummeting nearly 4.5% in early Wednesday trade.*
Performance of Southwest Airlines Company´s stock over 5 years. Source: tradingview.com
United Airlines (UAL) and Alaska Air (ALK) also saw declines of 1.2% and 0.3%, respectively, following the adjustment of their Q3 guidance.*
Performance of Alaska Air Group, Inc.´s stock over 5 years. Source: tradingview.com
Booking Trends and Challenges
Despite these challenges, Southwest Airlines remains cautiously optimistic about its future. While noting that August 2023 close-in leisure bookings were at the lower end, the airline emphasized that overall leisure demand and yields remain healthy. Furthermore, they expect a modest year-over-year sequential improvement in corporate travel during the third quarter.
Southwest hasn't made significant changes to its 2023 capacity plans compared to its previous guidance. Even with approximately 1,400 cancellations due to extreme weather disruptions, including hurricanes and wildfires, the company doesn't anticipate a substantial impact on its third-quarter results.
Analyst Outlook
Adding to the turbulence, Bank of America analysts recently slashed price targets for several airline stocks. They cited the increase in jet fuel costs as a key reason for downgrading their estimates and price targets. In a client note, the analysts mentioned that while they see steady to slightly better revenue trends, higher jet fuel costs are expected to lead airlines to lower margin and EPS outlooks. [1]
Conclusion
In the ever-volatile airline industry, rising jet fuel prices are a reminder of the challenges airlines face in maintaining profitability. As travellers, investors, and industry observers, we'll need to keep a close eye on how these increased costs impact the financial health of airlines and the fares we pay for our flights. The skies may be less friendly for airlines in the coming months, and passengers and investors alike should brace for potential turbulence. [2]
* Past performance is no guarantee of future results.
[1,2] Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or based on the current economic environment which is subject to change. Such statements are not guaranteeing of future performance. They involve risks and other uncertainties which are difficult to predict. Results could differ materially from those expressed or implied in any forward-looking statements.
