In the recently completed first quarter, travel demand held up surprisingly well, countering investor fears that rising inflation and energy prices would eat into big-ticket purchases like airfares. But cracks are forming in individual names.
Shares of Frontier Group Holdings(NASDAQ: ULCC) fell 25.5% in April, according to data provided by S&P Global Market Intelligence, and shares of Southwest Airlines (NYSE: LUV) and JetBlue Airways (NASDAQ: JBLU) were down 23.5% and 11.1%, respectively, as investors focused in on challenges facing these individual companies.
Company-specific turbulence has stocks in a holding pattern
Airline investors have gone on a wild ride in recent years. The pandemic sapped demand for air travel and caused airline stocks to plummet, but pent-up demand has led to crowded airports and sky-high profits in the years since. Recently, gains have been tempered by concerns about the health of the economy, but by and large, airlines forecasted solid demand and strong pricing heading into the all-important summer vacation season.
But not everyone is flying through smooth skies.
Southwest posted results that were soft relative to expectations and outlined the steps it was taking to curtail growth due to Boeing's issues delivering new airplanes. Southwest cut four airports and announced plans to reduce service elsewhere in response to a lack of planes.
The reaction would have likely been worse had the airline not telegraphed the issues earlier in the quarter, news that caused Southwest shares to fall 14.8% in March.
Over at JetBlue, management is having trouble generating growth after regulators successfully ended its effort to acquire Spirit Airlines. JetBlue warned second-quarter and full-year revenue would drop compared to 2023, saying it was focused on rebalancing its own network to emphasize its most profitable routes.
Frontier didn't announce first-quarter results in April. But that stock was hit by an announcement that the fund that controls about 80% of its shares would begin distributing it to its investors, potentially freeing up a significant number of shares available to trade on public markets.
A big increase in the number of shares available can negatively impact share price, at least temporarily, because it alters the supply-and-demand dynamics.
However, it's unclear whether there will be an immediate impact. Frontier chairman William A. Franke, who will receive about 44% of Frontier's stock, said in a statement that he looks forward to remaining as chairman "and participating in the upside of the company's bright future."
Is now the time to buy airline stocks?
All three of these airline stocks have lost more than 50% of their value over the past five years, and all three have significantly underperformed the US Global Jets ETF, a way to track overall airline stock performance. The spoils of the demand surge have mostly gone to large carriers, including Delta Air Lines and United Airlines Holdings.
That trend is unlikely to reverse any time soon. Southwest and JetBlue's problems will take years to fix, and in Southwest's case, the airline is largely at the mercy of Boeing to get its act together. With inflation remaining stubbornly high and interest rates likely to remain elevated, it is possible that the current demand surge will be over before these airlines are able to take advantage.
Frontier is the most intriguing stock of the group. On May 2, the airline reported a smaller-than-expected loss on strong revenue and close cost controls. The airline is a rare growth story in the industry, forecasting capacity growth of 12% to 15% this year.
Airline investing is fraught with danger, and the cyclical nature of this business should not be ignored. But for an investor interested in buying into one of these stocks following their decline, Frontier looks like the best choice right now.
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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool recommends Delta Air Lines and Southwest Airlines. The Motley Fool has a disclosure policy.
