Why airline stocks are rising even as disruption grows

Flight disruptions piled up at airports across the country ahead of the July 4 weekend, but airline investors largely ignored them.

More than 63,000 flights operated by US airlines, or 30% of their schedules, were delayed between June 24 and July 2. More than 9,000, or 4.2%, were cancelled. Both of these percentages are above the disruption averages so far this year, according to flight tracking site FlightAware.

On Tuesday, disruptions eased with nearly 2,500 US flight delays, half the number delayed on Monday, although thunderstorms continued to disrupt flights at major airports like Newark and Denver.

Recent delays have been mainly due to a series of storms, coupled with other issues such as a shortage of air traffic controllers in the congested airspace around New York and other regions, derailing travel plans for thousands of customers. This upset what has been a rather calm spring for travelers.

But exorbitant travel demand continues to keep airline inventories high, with several reaching multi-year highs.

The Transportation Security Administration said it screened nearly 2.9 million people on Sunday, a record for a single day. It’s the clearest sign yet of relentless demand for air travel as passengers book flights or cash in rewards points and make up for lost time after travel was halted by the Covid pandemic.

American airlines And Delta Airlines recently raised their earnings outlook on strong bookings. Lower fuel prices compared to last year also continue to be a tailwind for the industry.

Airlines will release their second quarter results and offer full summer outlook from mid-July, reports that will likely include the financial impact of the disruptions in late June and early July.

The stock gains of major US carriers this year far outpace the market as a whole.

United Airlines and Delta are each up 46% so far this year through Monday, while American Airlines is up 42%. For comparison, the S&P500 gained 16% over the same period. Delta and United recently hit their highest levels since June 2021.

South West Airlineswhose 2022 year-end slump drove it to a loss in the first quarter, is up 10% this year.

Even over the past week, as the travel chaos hit operations, many airline stocks topped the S&P 500. United Airlines was an exception. Its stock fell 1.7% as the carrier struggled to stabilize operations as storms continued to pass through its hub at Newark Liberty International Airport.

From June 24 to July 2, United saw the largest share of U.S. carrier delays, accounting for 42% of its main schedule, according to FlightAware.

Early last week, the Federal Aviation Administration cut the departure rate at Newark, which led to backlogs, CEO Scott Kirby said. When planes can’t take off, arriving flights have no place to park, so disruptions can easily snowball.

“Airlines, including United, are simply not designed for their largest hub to have its capacity severely limited for four consecutive days and still operate successfully,” Kirby said in a memo to staff over the weekend.

He said the airline will have to reduce its schedule at Newark, especially during the spring and summer storm season to avoid pile-ups unless there is more capacity at the airport.

Thunderstorms are difficult for airlines because they can occur without warning and are more difficult to predict than other types of weather like hurricanes or winter storms.

Airlines often delay flights to wait for thunderstorms to clear up and airspace to open up, rather than cancel, but crews can hit federally mandated workday limits, which adds to the disruption.

David Neeleman, founder and former CEO of Jet Blue Airways and CEO of Breeze Airways, said there was little an airline could do when there were such deep reductions in airline arrival rates.

Airlines might proactively cancel just for the weather to clear up, he said.