Global Airline Industry Forecast to Generate Record Operating Profit in 2024

December 18, 2023

Airline consolidation is not only relatively common but necessary for growth and competitiveness, and the recent announcement of Alaska Airlines’ planned acquisition of Hawaiian Airlines is a prime example of this trend.

The move, valued at $1.9 billion, signifies more than just a business transaction. It represents a strategic positioning for future growth in a highly competitive, highly concentrated sector.

Once the deal is completed, Alaska and Hawaiian will have a combined market share of approximately 8.2%, making it the fifth-largest U.S. airline—unless JetBlue Airways succeeds in getting regulatory approval to acquire rival low-cost carrier Spirit Airlines. More on that later.

Domestic Market Share of U.S. Airlines with Hypothetical Mergers

Alaska’ offer to purchase Hawaiian for $18 per share includes taking on $900 million in debt, but the potential advantages are substantial. The Washington State-based carrier not only gains a significant foothold in the lucrative, $18 billion Hawaii market but also achieves several strategic benefits:

  • Capacity Rationalization: The deal allows for better competition with Southwest Airlines by rationalizing capacity between the West Coast and Hawaii.
  • Fleet Expansion and Flexibility: Alaska will acquire widebody aircraft for long-haul flights and increase fleet flexibility for varied route options.
  • Enhanced Network Utilization: The merger promises improved utilization of large narrowbody aircraft within the combined networks.

The announcement sent Hawaiian’s parent company shares soaring 193% last Monday, reflecting the market’s optimistic view of the deal. This positive reaction underscores a broader trend in the airline industry, where smaller players seek mergers to stay competitive against larger rivals.

JetBlue’s Case to Acquire Spirit

Parallel to the Alaska-Hawaiian deal, JetBlue officially wrapped its case in federal court last week to acquire Spirit for $3.8 billion. If approved, the deal would reshape the U.S. airline industry, potentially challenging the dominance of the four major carriers and marking the most significant instance of airline consolidation since the American-US Airways merger in 2013.

According to Evercore ISI’s Duane Pfennigwerth, who was present for closing arguments on Wednesday, the judge’s line of questioning “read favorably for a settlement,” and JetBlue appeared to have “a more cohesive argument [than the Justice Department], which required less clarification by the judge.”

Among the most compelling arguments made by JetBlue attorneys is that the New York-based carrier requires scale to grow and compete against the Big Four airlines. Smaller competitors are expected to fill the gaps created by an outgoing Spirit, which JetBlue insists can’t make it alone in the current marketplace anyway.

The Justice Department is not so sure. The agency claimed that a JetBlue-Spirit merger would wipe out half of all ultra-low-cost carrier (ULLC) capacity in the U.S., depended on by many price-conscious Americans. Further, “Spirit anchors pricing in larger markets and is an innovator, with self-service bag drops an example of a recent innovation,” writes Pfennigwerth, summarizing the Justice Department’s line of reasoning.

Back to the Long-Term Average

Taking time from its court case in Boston, JetBlue raised its financial outlook for 2023, with expected annual revenue growth of 4% to 5%, up from earlier guidance of 3% to 5%, and a smaller-than-anticipated adjusted loss. This uplift is buoyed by strong bookings and operational performance.

Delta Air Lines reported robust holiday travel demand and increasing corporate bookings, projecting a bright end to 2023 and solid beginning to 2024. Speaking at the Morgan Stanley Global Consumer & Retail Conference, Delta CEO Ed Bastian doubled down on the carrier’s positive 2023 guidance, citing record revenues for the Thanksgiving holiday. Christmas bookings look to be “very, very strong,” Bastian said.

During his presentation, Bastian shared an interesting chart that shows that air travel as a percent of gross domestic product (GDP) has returned to the long-term average. Since 1980, soon after deregulation, commercial air travel expenditure has historically averaged around 1.3% of the U.S. economy, with notable deviations occurring as a result of 9/11 and the 2009 financial crisis. However, the most significant disruption was during the pandemic, resulting in approximately $300 billion of lost demand from 2020 to 2022.

Air Travel Revenue Returning to Long-Term Trend

The recent travel boom, Bastian pointed out, is a response to pent-up demand, though it’s only brought the industry back to the 1.3% average without addressing the missing $300 billion gap. Bastian expects to recoup this amount over the next few years as demand remains near or above present levels.

IATA Forecasts Record Operating Profits in 2024  

On a final, encouraging note, the International Air Transport Association (IATA) forecasts net profits of $25.7 billion for the global airline industry in 2024, with operating profits reaching a record $49.3 billion. North American carriers, which were first to return to profitability in 2022, are set to collect a combined $14.4 billion in profits, the IATA says.

This projection, coupled with an expected surge in passenger traffic, paints a picture of an industry on the cusp of a historic rebound.

Global Airlines Industry's Net Profit Projected to Exceed $25 Billion Next Year

The airline industry’s journey through the pandemic was fraught with challenges, but its rapid return to profitability is a testament to its resilience and adaptability. As the Alaska-Hawaiian and JetBlue-Spirit deals take shape, it’s clear that the industry is not just recovering but is actively reshaping itself for a new era of growth and competition.

JETS, the Pure-Play Airlines ETF

A number of the airlines listed can be found in the U.S. Global Jets ETF (JETS), a pure-play airline industry exchange-traded fund (ETF).

We like to call JETS a smart-beta 2.0 ETF. This means it tracks an index like most ETFs, but it also shares some characteristics investors might expect to see in an active fund. For instance, JETS is not strictly weighted by market cap weighted, unlike most other ETFs. Instead, it uses a number of quantitative factors to screen for and weight its constituents. It also rebalances and reconstitutes every quarter.

To see the entire list of holdings in JETS, click here.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Please carefully consider a fund’s investment objectives, risks, charges, and expenses. For this and other important information, obtain a statutory and summary prospectus for JETS by clicking here. Read it carefully before investing.

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.

Fund holdings and allocations are subject to change at any time. Click to view fund holdings for JETS.

Distributed by Quasar Distributors, LLC. U.S. Global Investors is the investment adviser to JETS.

The NYSE Arca Airline Index is an equal-dollar weighted index of the most highly capitalized companies in the airline industry.