The airline industry faced unprecedented challenges during the pandemic, with airline stocks experiencing significant declines. Investors have been eagerly awaiting a post-pandemic rally as airlines resumed operations and travelers began flying again. However, despite strong financial results and surging demand for air travel, airline stocks have not shown substantial performance gains. This article explores the factors contributing to the airline industry's mixed performance and whether airline stocks are a wise investment choice in November.
Strong Demand vs. Stagnant Stock Performance:
The resilience of the airline industry is evident in the robust financial results of top Canadian airliner Air Canada and U.S. carrier Delta Airlines. Both companies have reported impressive revenue growth in the first nine months of 2023. Air Canada's revenue surged by 40% to reach $16.6 billion, while Delta Airlines witnessed an 18% increase in revenue, totaling $43.8 billion. Despite this record demand for air travel, airline stocks have remained stagnant, trading near their lows.
Soaring Costs Impacting Airlines:
The resurgence of inflation has been a notable concern in 2023, impacting various industries and individual consumers. Rising costs, including fuel, labor, and interest rates, have affected the airline industry profoundly. Notably, jet fuel, closely tied to oil prices, has surged in price. TSX AC reported that jet fuel expenses in the first nine months of 2023 were 44% higher than in 2019, totaling 109.6 cents per liter. Furthermore, the cost per available seat mile (CASM) for Air Canada reached 12.2 cents, marking a 12% increase compared to 2019. The upward pressure on wages, salaries, and benefits also soared by 22% in the first nine months of 2023, compared to the previous year.
Wage Increases and Impact on Costs:
The trend of increasing wages and benefits, especially among airline employees, poses a significant challenge. For example, Air Canada's competitor and second-largest carrier, WestJet, secured a substantial 24% pay raise for its pilots over the next four years, amounting to an estimated $400 million in additional compensation. Air Canada pilots are now eyeing similar deals, which will exert additional upward pressure on operating costs.
Higher Interest Rates and Air Travel Demand:
Interest rates have experienced a notable increase over the past two years, leading to financial strain for many consumers. The higher interest rates have resulted in significantly increased mortgage payments, car payments, and general loan repayments. This added financial burden is expected to impact air travel demand, as consumers' budgets become stretched. Whether interest rates stabilize or decrease slightly, it is likely that this financial pressure will impede the upside potential for airline stocks.
While there is strong demand for air travel and impressive revenue growth for major airliners, the airline industry faces formidable challenges, primarily due to soaring costs and rising interest rates. These factors have weighed on the performance of airline stocks and may continue to do so in the near future. As investors evaluate the prospects of airline stocks in November, they should consider these complexities and challenges in the airline industry