Proprietary Data Insights
Top Airline Stock Searches This Month
First, The Bad News
There’s actually a fair bit of good news on the cost of something many of us love to do – travel.
Preview: Good news for travelers, not necessarily investors.
We’ll get to it in a second, but first the bad news.
Wait For It
On the bright side, the government will likely scrutinize JetBlue’s (JBLU) deal to buy Spirit Airlines (SAVE). This will add to the already long time it takes for two airlines to become one.
However, when they do, the outcome isn’t good for travelers even if you never fly Spirit (and we hope you don’t!), according to the sharp folks at Scott’s Cheap Flights.
Scott’s sent an email this week on the proposed buyout, which started with some history:
In 2015, when Delta first unveiled cheaper “basic economy” tickets, they described them succinctly to investors: “Spirit-match fares.”
This moment kicked off the Golden Age of Cheap Flights, and made previously unthinkable fares like $350 roundtrip to Paris or $200 roundtrip to Hawaii possible.
Then, some context:
The single largest determinant of cheap flights isn’t how far you fly or how large the destination is; it’s how much competition there is between airlines.
At the time of writing, it costs $98 roundtrip to fly 1,085 miles NYC to Miami but $216 roundtrip to fly 425 miles NYC to Cleveland. There’s a ton of competition for NYC-Miami and relatively little for NYC-Cleveland.
And which airlines offer the cheapest fares on any given route? Budget airlines like Spirit.
So, with Spirit eventually gone, larger airlines, such as Delta, will have one less budget carrier to compete with. Not good.
The airfare experts at Scott’s close their analysis with some optimism:
We don’t like this merger because with one fewer competitor… the outcome will be less competition.
But that doesn’t mean the death of cheap flights…
Fifty years ago, airlines relied almost entirely on economy airfare to fund their business.
Nowadays, many airlines make the majority of their revenue on things other than economy airfare. They make it selling business class and other premium seats. They make it selling credit cards and frequent flyer miles. They make it on corporate contracts and cargo and bag fees and commissions when you book a hotel or rental car through an airline.
We’ll wait to see how the JetBlue-Spirit situation plays out. In the near-term, skies appear clear if you’re looking to travel. Scroll with us to find out why.
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Flying Is About To Get Less Expensive
There’s the good news.
After going north of $400 in the May-June time frame, domestic airfares could come down to an average of $286 per ticket this month. That’s a 25% decrease from the peak.
While they’re expected to surge as we approach the holidays, they’ll remain below $400 and precipitously decline as we enter 2023.
Domestic traffic was up 5.2% year-over-year in June, but still just at 81.4% of 2019 levels. Maybe more affordable airfares will help get things back to where they were pre-pandemic.
Does This Make Airline Stocks A Buy?
In a word, nope.
As The Juice noted earlier this week, amid economic uncertainty, stick with leaders who have proven they can weather storms. Apple (AAPL), Costco (COST), and so on.
Even beyond this long-term perspective, your speculative investing dollars are better spent outside of the airline industry.
Who Do You Have More Confidence In?
Aforementioned Apple and Costco?
Or, say, Starbucks (SBUX), a beaten down company that still has a loyal customer base eager to drop $5 on a latte? Plus, Starbucks, even with its massive brick and mortar presence, is far more nimble than airlines, who tend to be directly tied to so much of what makes the economy uncertain.
Airlines must grapple with unpredictable energy costs.
Fuel prices account for up to 30% of an airline’s operating costs. They drive the top and bottom line. And they’re unpredictable. Just look at this topsy turvy chart so far in 2022.
So, as Scott’s pointed out, major airlines rely on other sources of revenue to offset high fuel prices. Such as selling branded credit cards. They can barely manage their core businesses. The Juice has scant confidence they’ll perfect ventures outside of their wheelhouse.
Consider American Airlines (AAL)
On the surface, American is doing well. The company beat earnings estimates for Q2 and expects a strong, even profitable Q3. However, even with this improvement, American’s results will come in below 2019 levels.
And it’s not just fuel prices. If the economy heads into a recession, this will likely hurt demand during a time when a staffing shortage has forced the airline to give pilots massive raises.
The Bottom Line: Airlines have little, if any room for error. As an investor, this does not breed confidence.
If you really want exposure to the industry, you’re probably better off taking a more broad approach via an ETF such as the US Global Jets ETF (JETS). Through JETS, you remove the guesswork of trying to pick individual stocks.
An even better bet? Go even more broad.
The SPDR S&P Transportation ETF (XTN) owns some airlines, however it also counts FedEx (FDX), United Parcel Service (UPS), and Old Dominion Freight Line (ODFL) in its top ten holdings.
The top airline held by the fund? It’s actually Spirit, by far 2022’s top performer among big name airlines.
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