Airline stocks head for first annual gain since before the pandemic

US airline stocks weathered a domestic travel slowdown and geopolitical turmoil to notch their first yearly gain since 2019, capping a hard-fought rebound from when the pandemic grounded aircraft and pummeled the industry.

The S&P Supercomposite Airlines Industry Index advanced 7.1% this year, its best annual performance since rising 12% four years ago. SkyWest Inc. leads the nine-member gauge with a 217% surge, followed by 20% pops from Delta Air Lines Inc. and Allegiant Travel Co.

The swing back to positive performance reflects consumers’ persistent demand for experiences despite the looming threats that elevated interest rates would rein in discretionary spending and conflict in the Middle East would exacerbate oil volatility. Record holiday travel has helped to brighten the financial outlook for the industry, with Delta, JetBlue Airways Corp. and Southwest Airlines Co. all making note of strong year-end bookings.

“Valuations are rising recently as investors look past fare weakness to lower fuel prices which could provide the ability to cut fares and support demand with minimal or no impact on profit,” says Bloomberg Intelligence analyst George Ferguson.

Challenges remain. The airlines index is still a ways away from the 52-week high it set in July, and this year’s jump isn’t close to making up for the roughly 56% it lost during the prior three years. There is also a risk that leisure travelers scale back their vacations in the new year as employers ramp up return-to-office mandates, and as consumers hit the brakes after leaning too heavily on their credit cards to fund everything from “revenge” getaways to expensive restaurant meals.

Yet many are optimistic that an end to the Federal Reserve’s tightening cycle will help improve consumer confidence and support leisure and corporate travel. Delta will be the first major US carrier to give a read on fourth-quarter performance and 2024 expectations when it releases results on Jan. 12.

“While the economic slowing is expected to continue into a mild recession in 2024, it is not expected to cascade into the types of recessions we are used to,” wrote Raymond James analysts led by Savanthi Syth. “Importantly, it might not be accompanied by the typical cuts in employment due to a tight labor market, potentially supporting travel demand.”