As the U.S. airlines begin reporting their first quarter 2021 earnings this week, all eyes will be on their projections for the crucial summer travel season, which should rebound after the mass vaccination drive in the country.
Early signs show that, after facing the worst plunge in air traffic during the pandemic, airlines are going to have a busy season. Delta Air Lines (NYSE:DAL) said last week it recalled all of its 1,713 idled pilots on Apr. 1, before staffing shortages contributed to about 100 flight cancellations.
The pilot recalls show how U.S. airlines are stepping up efforts to prepare for a potentially busy summer as more people receive COVID-19 vaccinations. United Airlines (NASDAQ:UAL) said in late March it would hire 300 new pilots to meet growing demand.
Delta will report Q1 earnings on Thursday before the market open. On average, analysts are expecting a loss of $2.84 a share on sales of $4.02 billion. Investors will focus on its cash-burn rate and any sign of recovery in business travel.
American Airlines (NASDAQ:AAL), in an advance release of its Q1 numbers, warned investors yesterday that it could lose more than $1.2 billion for the period when it reports earnings next week and that a recent uptick in ticket sales didn’t prevent its cash burn.
Fort Worth-based American Airlines was the second major carrier, following United, to warn that the COVID-19 pandemic is still battering financial results, a sign that it could take much longer than anticipated to repair the financial pain from the pandemic that almost wiped out international travel.
Signs of Revival
Despite these warnings, there are hopeful signs that Americans are travelling more domestically, helping airlines to cut their losses. More than 1.5 million passengers passed through domestic security checkpoints on Apr. 4, compared with just 122,029 a year earlier.
United and American have said their planes are about 80% full. Delta’s reliability will improve this spring and summer “as more of our workforce becomes vaccinated and more pilots return to active flying,” the company said in a statement last week.
The potential revival in airline travel has sparked a massive rally in airline stocks. After November's vaccine breakthroughs, airline shares surged, pushing the world’s largest airlines-focused ETF, U.S. Global Jets ETF (NYSE:JETS), higher. It's gained 48% during the past six months.
That rally showed investor confidence that the successful development of vaccines will help improve travel demand and, ultimately, benefit the stock market’s most-battered members. The pandemic ended the decade-long streak of profits enjoyed by airlines, sparking losses of more than $20 billion for the sector last year.
But a turnaround in travel demand may not come soon enough, nor as aggressively as some investors are hoping, due to international travel bans and still depressed demand for business travel.
According to Cowen analyst Helane Becker:
“Globally, countries still need to reopen their borders, as well as reopen tourist attractions and the like before people travel internationally. Airlines need for things to reopen and for borders to reopen and the revenue issue will resolve itself.”
United Airline CEO Scott Kirby said in January that there was lots of evidence that shows there is huge pent-up demand for travel, but he was less certain that it will happen as early as this summer.
According to some estimates, the business category could end up being as much as 15% smaller because of the videoconferencing trend that took off during the pandemic.
According to Deutsche Bank, U.S. airlines will continue to struggle with a record debt load of $170 billion. That means “airlines will have no choice but to allocate the majority of their free cash flow to debt paydown,” according to the bank.
Bottom Line
A sharp rebound in airline stocks shows investor confidence that people will resume normal travel once they are vaccinated. But that optimism is very much reflected in their current stock prices and doesn’t leave room for further upside in the short-run.
The upcoming earning reports will likely prove the point that airlines are on a long journey to recover losses and show profits.