Revenge Travel Sends Airlines Soaring

The global pandemic has trapped consumers in their house for the past two years. Spending habits tilted toward home improvement projects, clothing, and other material ‘things’ during the lockdown.

Travel was not an option.

The first week of earnings season shows that spending patterns are changing. Travel and Entertainment is returning with a vengeance.

Spending Habits Change

To wit, we had two earnings reports highlighting this turn. Delta (DAL) and Bed Bath and Beyond (BBBY) posted Q1 earnings. The commentary was contrasting.

BBBY stated that industry trends have worsened since February amid market volatility and overall consumer uncertainty ‘surged’.

On the flip side, Delta said that it saw record bookings in the quarter and insatiable demand despite rising fares.

Inflationary pressures are a major concern for markets. Consumer spending habits are being closely watched. Which one of these companies is providing better insight into purchasing habits?

The answer may come from a third earnings report, J.P. Morgan (JPM). The bank’s credit card unit posted a 21% year over year rise in consumer spend in Q1. The bank said it saw the biggest jump in Travel & Entertainment. Bank of America (BAC) provided additional evidence as it reports credit and debit card spending increased 15% in the first week of April. Card spending among cardholders with less than $50K in annual income jumped 33% in that period.

The consumer remains strong, they are just spending on experience over things.

According to Citigroup, early indications are that higher fares at airlines are propelling domestic April and May passenger revenue close to pre-pandemic levels. All three segments- leisure, corporate, international- are improving concurrently.

Airlines are confirming this environment.

Airline Earnings Results and Commentary

American Airlines (AAL) got the ball rolling when it raised its financial outlook last week. The company lifted its revenue guidance as well as its outlook for Available Seat Miles (ASM).

Delta followed this up with a solid report and commentary on Wednesday morning. The company posted sales of $9.3 billion, well above the expected $8.8 billion. It did lose $1.23 per share in the quarter but that was 4 cents better than expected. The loss was due to the impact of Omicron in the first two months of the quarter.

March was a different story. The airline saw record bookings in the month. The strength helped push operating margins to 10%. It looks like this pattern is sustainable as the Atlanta-based airline forecast operating margins of 12-14% for 2022. Pandemic threats remain but are receding as the public’s trust in vaccines increases.

There are the inflationary fuel cost concerns. Crack spreads- the spread created in commodity markets by purchasing futures to offset positions- surged to levels last seen when Hurricane Katrina significantly impacted the U.S. refining complex. Crack spreads are running between $30-50 per barrel compared to historical averages of $10-20.

Citi sees convincing evidence that domestic airfares are on the rise and should help offset rising crack spreads. DAL said that it is recapturing run up in fuel prices in real time.

It does not appear that the rising prices are offsetting demand. U.S. official data reported airfare is up 24% from the prior year. On its call, DAL said that it did not see any hesitancy in bookings after it raised fares.

Leisure demand has fully recovered. The most upside is in international and corporate travel. DAL ran a survey of its corporate accounts. 90% said that they plan to travel more in Q2.  This favors the likes of DAL, AAL, and United Airlines (UAL).

Travel Names to Watch

The change in consumer sentiment will be a key theme to watch play out in Q1. Not all retail will see the same fate as BBBY. Luxury brands should be insulated as inflation does not impact the rich as much as low- and middle-income shoppers. This was evident by a strong report overseas from Hermes.

However, the lead is simple: Travel names should see a greater share of consumer wallet for the next few quarters.

We want to put a few names on your radar that should see a strong fundamental tailwind as we head deeper into earnings season.

  • Cruise Lines
    • Royal Caribbean (RCL)– Great looking chart that is pushing above its 200-SMA and threatening a breakout above $87.
    • Carnival Corp (CCL)– Edged above its 50-SMA ($19.80) and has some room to run before seeing resistance at the $21.50 level.
    • Norwegian Cruise Line (NCLH)– We would be a little more cautious given the international exposure but this is setting up for a push to $23 and attest of resistance.
  • Travel ETFs
    • S. Global Jets ETF (JETS)– A key read for the overall industry as it tests 200-SMA resistance at the $22 area. We want to see momentum continue above this level. DAL, UAL, AAL, and Southwest (LUV) make up 40% of this ETF.
    • Airline, Hotel, and Cruise ETF (TRYP)– Less volume in this but for those who like ‘cheaper’ ETFs, this one trades at $4.69 and provides across the board exposure to the travel industry.
  • Travel Names
    • Booking Holdings (BKNG)– Stock is testing the 50- and 200-SMA confluence area of $2279-2310) for major resistance. Keep an eye on Alphabet’s (GOOGL) report as it provides key insight into search habits.
    • Expedia (EXPE)– Good looking chart as it edges above its 50-sma. This name has breakout potential if it can rally above the $200-psyche level.
    • AirBnB (ABNB)– The stock recently found support at the $140 level and is pressing back for a possible breakout above $175. This is a level that has provided resistance for the stock over the past two months.