Connect with us

Travel

Wall Street Bets Against Airlines Despite Summer Travel Boom

Published

on

Wall Street Bets Against Airlines Despite Summer Travel Boom

(Bloomberg) — Americans are flying in record numbers as summer travel season kicks into gear, but traders are betting that airlines won’t be able to capitalize on it.

Most Read from Bloomberg

Short interest in the $1.1 billion aviation industry exchange-traded fund US Global Jets (ticker JETS) accounts for over 27% of the ETF’s free float after touching 30% earlier this month, the highest in data going back to 2019, according to S3 Partners LLC.

The lack of faith makes sense based on the performance of airline stocks. JETS is down 13% over the past 12 months and the nine-member S&P Supercomposite Airlines Index has plunged 22%, compared with a 26% surge in the S&P 500 Index.

Meanwhile, air travel is booming. US carriers are projected to transport a record 271 million passengers from June 1 to Aug. 31, representing a 6.3% jump from the same period last year, according to industry trade group Airlines for America. And globally, airline profits are expected to rise to $30.5 billion in 2024, based on projections from the International Air Transport Association, which recently lifted its outlook from the $25.7 billion it estimated back in December.

So what’s the problem for airlines? In a word: margins.

Shortages of pilots and cabin crew have forced carriers to increase wages to attract talent. Air traffic control constraints have led to costly disruptions. And airlines are finding that their growth plans were overly ambitious, leading to an abundant supply of available seats and cut-rate promotions to fill planes. Meaning, many of the passengers flooding airports right now are boarding at cheaper prices.

“Just because TSA says there’s a heck of a lot of people going through security, that doesn’t mean that we’ve got an industry that’s killing it,” said George Ferguson, a Bloomberg Intelligence analyst. “If I were an investor, I would want record profits, too — and from a margin perspective, we don’t have that.”

Delta Air Lines Inc. kicked off airline earnings on Thursday, delivering a warning that profit in the third quarter will fall short of expectations as heavy competition in the domestic market drives airfares down. Shares of the Atlanta-based carrier fell 4%. The stock has climbed 12% so far this year, making it the second best performer in the S&P airline index after SkyWest Inc.

Delta’s weak outlook adds more uncertainty to a sector that’s already been sounding alarms on corporate guidance. Southwest Airlines Co. dialed back its revenue outlook for the second quarter late last month amid pressure from activist Elliott Investment Management to overhaul its leadership, and American Airlines Group Inc. cut its profit forecast in May.

The pain is most intense for low-cost carriers. Shares of Frontier Group Holdings Inc. are down 21% this year, while Spirit Airlines Inc.’s stock has lost 81% in 2024 and is trading near all-time lows. In just the past few days, two of the 13 Wall Street analysts who cover Spirit — Raymond James’ Savanthi Syth and Deutsche Bank’s Michael Linenberg — cut the stock to sell-equivalent ratings.

As a result, investors are fleeing JETS, withdrawing over $589 million from the ETF this year and dragging its assets down to the lowest level in four years, according to data compiled by Bloomberg.

Many airlines are now taking steps to curb supply by dropping underperforming routes and putting off delivery of new planes as Boeing Co. continues to struggle production and manufacturing issues. Airbus SE cited persistent supply-chain issues when it cut a slew of longer-term goals last month, adding to a shortfall in new jets. Many US airlines are expected to end the year with smaller fleets, suggesting much more balanced supply in the coming quarters.

In the meantime, carriers are expected to continue to struggle.

“Multiples for the airlines have been really, really depressed,” said Sheila Kahyaoglu, a research analyst at Jefferies. “What we’re seeing is that a lot of long-only investors still don’t have much appetite to return to the space.”

(Updates with closing prices throughout.)

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.

Continue Reading