Airline stocks fell hard during the pandemic, as they were hit with unimaginable pain. Yet, many investors have been hoping that the end of the pandemic would see airline stocks rally again, as airliners opened up for business and consumers began travelling once again. But this has not happened as of yet. Strong results have not translated into strong airline stock performance.
Are airline stocks actually a good buy in November?
Record demand for air travel sends airliner revenue soaring
We need to look no further than the results of Canada’s top airliner to see proof of record demand. In fact, Air Canada (TX:AC) has posted strong revenue results for the first nine months of 2023 – revenue increased 40% to $16.6 billion. Similarly, US airliner Delta Airlines has also seen strong demand this year, with its revenue rising 18% in the first nine months to $43.8 billion.
Yet despite this strong demand environment, airline stocks have not caught a break this year. As you can see from the graph below, both Air Canada’s (AC) and Delta Air Lines stock price have been flat this year, and pretty much trading near lows.
So what’s going on?
But costs are also soaring for airliners
Inflation was a much talked about story this year – and for good reason. The level of inflation has sent costs higher in every industry as well as for individual consumers. Costs such as fuel, labour, interest, and many more have been taking their toll.
For airline stocks, this has spelled disaster. Let’s start with one of the airliners’ biggest costs, jet fuel, whose price is obviously a function of oil prices. For Air Canada, in the first nine months of 2023, jet fuel expense was 109.6 cents per litre, 44% higher than in 2019. Also, Air Canada’s cost per available seat mile, or CASM, was 12.2 cents, 12% higher than 2019. Finally, we have the upward pressure on wages, salaries, and benefits, which increased 22% in the first nine months of 2023 relative to last year.
As for the future, this upward pressure on wages appears to be just beginning. Air Canada’s biggest competitor and second largest carrier, West Jet, is an example of what we can likely expect in Air Canada’s near-term future. In May, WestJet pilots secured a 24% pay raise to be instituted over the next four years, and an estimated $400 million in total additional compensation. And now, Air Canada pilots are picketing and eyeing the same type of deal. This will inevitably put even more upward pressure on Air Canada’s costs and (AC) stock price.
Higher interest rates will likely hit air travel demand
As you know, interest rates have soared in the last two years. This has left many consumers hurting and many more stretched beyond their financial capability. In the end, higher interest rates will exacerbate the already difficult toll that inflation has taken on consumers.
If we consider the effect of significantly higher mortgage payments, car payments, and general loan payments, it’s not difficult to come to the conclusion that air travel demand is likely to be hit. Whether you believe rates will remain at this level, or come down a bit from here, the fact is that a certain degree of pain is inevitable. In my view, this will hit airline stocks and keep a lid on their future upside.
