Airline stocks tumbled sharply this week after the Federal Reserve announced a 75-basis-point interest rate hike Wednesday to curb the highest inflation in over 40 years.
The decline in the airline sector outpaced the broader market’s slump, with American Airlines (NASDAQ: AAL) plummeting 8.6% Thursday, its lowest point in almost 2 years.
Shares of Southwest Airlines (NYSE: LUV) dropped 6%, while Delta Air Lines (NYSE: DAL) and United Airlines (NYSE: UAL) each lost more than 7%.
The NYSE Arca Airline Index, which tracks the performance of 18 airline companies, is down almost 8% in premarket trading Friday.
The slump in airline stocks came after the Fed introduced the most aggressive interest rate hike since 1994 to fight the record-high inflation.
“If you’ve flown on a plane lately, planes are very full and plane tickets are very expensive,” Federal Reserve Chairman Jerome Powell said Wednesday.
Robust Rebound in Demand
Apart from high inflation and the consequent decline in stocks, the airline industry has seen multiple positives this year including a strong rebound in travel demand following two years of lockdowns and travel restrictions due to the coronavirus pandemic.
Airline companies said that consumers have been tolerating higher ticket prices so far, though the carriers have been facing supply constraints. As a result, Delta Air Lines, JetBlue, Spirit Airlines, and Alaska Airlines, among others, have reduced their summery flying programs to become more flexible in case of routine disruptions and labor shortages.
Executives of airline companies are reportedly set to hold talks with Transportation Secretary Pete Buttigieg to discuss their condition and readiness following a jump in the number of delays and cancellations in 2022.
Travel fare tracker Hopper said prices for domestic air travel declined for the first time this year, with round trips now averaging $390, down from $410 last month.
Low-cost carrier Avelo Airlines said Thursday it was slashing its fares 50% to all 25 destinations “to help provide some inflation relief for folks during these uncertain times.”
It will be very important to see how will travel activity change after the summer boom, which is when usually business travel gains momentum. Some believe that business leaders could reduce their travel plans this year due to fears over a potential recession.
“The market is just reacting to anything that’s cyclical, anything that’s considered sensitive to the economy,” said Savanthi Syth, airline equity analyst at Raymond James. “As frustrating as it is to watch the stocks … we are going into this recession like we’ve never gone into one before.”
Flights Cancellation a Trend Now
On Thursday, pilots for Delta Air Lines published an open letter to customers, saying the increase in the number of flight delays and cancellations is “unacceptable,” adding they were flying a record number of overtime hours to help travelers reach their destination.
The carriers said its pilots have been flying more overtime this year than in 2018 and 2019 combined, adding they understand and share customers’ frustration over recent cancellations and delays.
Delta and other airlines have seen a massive number of flight cancellations this summer, which carriers say come as a result of labor shortages following the Covid-19 pandemic.
The Atlanta, Georgia-based carrier said it will continue strategically reducing its flight schedule this summer in an effort to boost resilience and “improve operational reliability.”
Delta is joined by other major companies including Southwest Airlines, which also reduced 20,000 flights for this summer.
However, The Air Line Pilots Association (ALPA) opposed carriers’ complaints about a staffing shortage earlier this month, arguing that airlines are making a “fictitious claim” about a lack of
available pilots, aiming to undermine safety regulations for profits.
The association cited data from the Federal Aviation Administration (FAA), which shows that 8,000 new pilots were certified in the past 12 months.
Summary
Rising interest rates and aggressive actions by the Federal Reserve are making investors increasingly nervous about the recession, which could ultimately soften the demand for travel and leisure. Moreover, staffing challenges are forcing airlines to cancel flights, a trend that is also weighing on the performance of stocks in this sector.
