Inflation in the United States has recently jumped at its fastest rate since 1981, and consumer sentiment is falling. Those economic indicators are raising questions about the ability of the American consumer to keep spending.
In times of uncertainty, it can be hard to pull the trigger on expensive discretionary purchases like airline tickets. Investors are running for the emergency exits, sending shares of airlines including United Airlines Holdings (NASDAQ: UAL), American Airlines Group (NASDAQ: AAL), Southwest Airlines (NYSE: LUV), and Delta Air Lines (NYSE: DAL) down about 5% apiece.
Airline investors are understandably nervous. The industry came into the year on an unstable footing, beaten down by the pandemic and the dramatic decline in travel demand that followed. Strong pent-up demand for vacation travel this summer has planes full, but a combination of labor shortages and high fuel costs are limiting the upside for airlines.
The last thing the industry needs right now is a post-summer falloff in demand. Yet with inflation soaring higher, there is a real risk that Americans will look for ways to tighten their belts. If the choice is down to buying groceries or buying airline tickets, the airline tickets are going to go.
United, American, Southwest, and Delta combine to control more than 80% of the U.S. market, and none can afford to get into fare wars with lower-cost options like Spirit Airlines (NYSE: SAVE) or Frontier Holdings Group (NASDAQ: ULCC). In normal times, business and international demand could offset some of any falloff in leisure travel, but both have been slow to recover post-pandemic, and it is far from certain that corporate travelers will fill all the seats once the summer ends.
On a day when investors are in panic mode and the broader markets are down more than 2%, investors aren’t in a mood to wait around and find out what the threat of inflation will mean for airlines in the months to come.
The damage might have been worse if not for a decision by the U.S. government to drop COVID testing requirements for arriving international travelers. The travel industry had been lobbying for the change, saying it was a damper on international demand.
That’s a sliver of good news on a down day, but not enough to overcome the wall of uncertainty clouding the outlook for these airline stocks. For those with a long enough time horizon, Delta and Southwest are two top operators and should be able to recover faster than the industry as a whole. But based on current macroeconomic conditions, that recovery might be years away, meaning there is no reason to rush in and buy the dip.
The airlines are in a holding pattern for now. Until these storm clouds clear, investors should not expect these stocks to take off.
Lou Whiteman has positions in Delta Air Lines and Spirit Airlines. The Motley Fool has positions in and recommends Spirit Airlines. The Motley Fool recommends Delta Air Lines and Southwest Airlines. The Motley Fool has a disclosure policy.