After steadily marching higher in anticipation of travel demand normalization following the devastating Covid-19 pandemic, airline stocks suffered an unwanted reality check. Specifically, United Airlines (NASDAQ:UAL) sparked jitters throughout the industry as it disclosed soft guidance yesterday for its fiscal fourth quarter. Unfortunately, the news impacted other airliners, including Delta (NYSE:DAL) and American Airlines (NASDAQ:AAL).
According to The Wall Street Journal, United posted a net profit of $1.14 billion, translating to earnings per share of $3.42. This compared favorably to the $942 million or EPS of $2.86 posted in the year-ago quarter. Further, when adjusted for non-recurring items, United’s EPS clocked in at $3.65, beating the analysts’ consensus target of $3.38.
On the top line, the company rang up sales of $14.48 billion, reflecting a year-over-year increase of 12%. This tally also beat analysts’ consensus view of $14.43 billion. Interestingly, revenue from premium products accounted for more than half of all passenger revenue.
However, the troubles began when the airliner guided Q4 EPS to land between $1.50 and $1.80, according to Seeking Alpha. On the other end, analysts targeted an EPS of $2.09. Further, the low end of United’s forecast assumed a ban on flights to Tel Aviv until the end of 2023, a consequence of Hamas’ attack on Israel.
Airline Stocks Feel the Heat
Understandably, panic set in among investors, with the consumer economy broadly suffering from various post-pandemic headwinds. In the midweek session’s afternoon hours, UAL slipped more than 8%. However, the red ink wasn’t isolated, with the soft guidance dragging down several airline stocks.
Aside from the horrific terrorist attack and the ongoing humanitarian crisis, United’s management team also identified surging jet fuel prices as a major obstacle. Specifically, the company expects to pay $3.28 a gallon for fuel in Q4 versus the $2.95 it paid in Q3. Unfortunately, the combined challenges clouded United’s otherwise encouraging update on robust domestic air travel demand.
To be sure, not all market experts took a dim view of UAL and other airline stocks. Barclays, in particular, defended United, pointing to UAL’s relative share value thanks to the underlying global exposure. Still, investors sitting on the fence also carry justification for their pensiveness.
Earlier, the concept of revenge travel — or pent-up demand for experiences following the pandemic-mandated restrictions — bolstered at least the fundamental narrative of airline stocks. But this view may be coming under increased scrutiny.
Citing data from Morning Consult, CNBC reported that while travel intentions are increasing in several countries, they’re flatlining or falling in others, most notably in Europe. Broadly, this framework may indicate that consumer challenges such as persistently high inflation may finally crimp demand.
Why It Matters
Against the January opener, UAL finds itself down almost 1% against parity. Similar disappointing underperformance impacts other airline stocks. For example, AAL fell almost 11% during the same period while DAL has only managed to gain 2%.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
