Airlines Are Bracing for Record Summer Travel. A Golden Opportunity for Investors?

June 8, 2023

If current forecasts are accurate, this summer could mark a historic high in airline passenger volumes. The industry group Airlines for America (A4A) predicts that approximately 257 million people will travel on U.S. commercial airlines from June 1 to August 31, representing a 9.5% increase from the previous summer. That would also set a new record, as volumes are projected to surpass the summer 2019 levels by around 2 million passengers.

Record Number of Air Passengers Expected this Summer on U.S. Carriers

To meet demand, airlines will employ larger aircraft and increase capacity by adding approximately 297,000 seats per day. Airlines for America (A4A) expects the daily average of seats this summer will reach nearly 3.4 million, an increase from 3.3 million per day during the summer of 2019. This translates to an estimated 137 seats per flight, representing a 14% rise compared to four years ago.

A4A wasn’t the only airlines industry group to issue a positive forecast for 2023. The International Air Transport Association (IATA) raised its global airline profit outlook to $9.8 billion by year-end, more than double the previous forecast of $4.7 billion. The group expects around 4.35 billion people to fly commercial in 2023, or about 96% of 2019 levels.

Memorial Day weekend is typically viewed as the informal launch of the busy summer travel season, and this year was no different. According to data from the Transportation Security Administration (TSA), some 9.8 million people flew on commercial airlines in the U.S. from Friday to Monday of the Memorial Day weekend. This figure was slightly higher than the 9.7 million who traveled during the same holiday weekend in 2019.

American Airlines Raises Q2 Guidance Amid Strong Demand and Lower Fuel Costs

American Airlines, the world’s largest airline by passengers carried, upgraded its guidance for the second quarter based on what it sees as “continued strength in the demand environment.” In a regulatory filing, American said it now forecasts quarterly earnings per share to fall within the $1.45 to $1.65 range, an increase from its previous estimate of $1.20 to $1.40 per share.

The revision is based on not only stronger-than-expected demand but also lower fuel costs. The carrier estimates it will pay between $2.55 and $2.65 per gallon on average during the quarter, or $0.10 less per gallon than its initial forecast. Fuel consumption is also down compared to years past since American is flying larger aircraft that can accommodate more passengers per flight; this approach is more efficient than operating smaller jets with fewer passengers.

Investors appear to have recognized airlines’ versatility and ability to raise capacity to meet demand. Shares of U.S. airlines have soared over 27% so far this year through Friday, June 2, more than double what the S&P 500 has returned. Standout performers included United Airlines, up 27% for the year, and American, up 17%. Among the Big Four carriers, Southwest Airlines was the only one to trade in the red, as it continues to face challenges after its network meltdown during Christmas 2022.

Shares of U.S. Airlines Have Doubled the Performance of the Market So Far This Year

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Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the funds. Brokerage commissions will reduce returns. Because the funds concentrate their investments in specific industries, the funds may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries. The funds are non-diversified, meaning they may concentrate more of their assets in a smaller number of issuers than diversified funds. The funds invest in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. These risks are greater for investments in emerging markets.

The funds may invest in the securities of smaller-capitalization companies, which may be more volatile than funds that invest in larger, more established companies. The performance of the funds may diverge from that of the index. Because the funds may employ a representative sampling strategy and may also invest in securities that are not included in the index, the funds may experience tracking error to a greater extent than funds that seek to replicate an index. The funds are not actively managed and may be affected by a general decline in market segments related to the index.

Airline Companies may be adversely affected by a downturn in economic conditions that can result in decreased demand for air travel and may also be significantly affected by changes in fuel prices, labor relations and insurance costs.

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The S&P GSCI is widely recognized as a leading measure of general price movements and inflation in the world economy. The NYSE Arca Airline Index is an equal-dollar weighted index of the most highly capitalized companies in the airline industry. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.