Airlines are back. Travel is back. It went from zero to one hundred, real quick. One month we are confined to our own region, and suddenly half of our Instagram feed is in Europe. The turnaround has been quick and dramatic, but none more so than for the airlines themselves as they are faced with the welcomed problem of over-the-top demand. 

Sleeping flying machines are currently being woken from their slumber in desert parking lots as aviation and tourism come back to life after the Covid-induced hiatus. Airlines are finding themselves short-handed and are bringing these beasts back to life. Among many others, Air New Zealand is picking up one of its 777s and Cathay Pacific is awakening the majority of its fleet to satisfy passenger demand, ultimately signalling a bullish outlook for the airline industry.

Many airlines, including our flagship carrier Air New Zealand, required massive capital injections to survive the last two years. Thankfully for some, operating losses are being turned around with the increase in demand. Take a look at Abu-Dhabi based Etihad Airlines, which flew to an operating profit of $296 million in the first half of 2022. Not bad for an airline that has posted six consecutive annual net losses amounting to $7.8 billion in the last six years. The S&P 500 Airlines index is up around 11.7% since the end of June alongside the industrial sector as a whole which is up roughly 12%.

However, it is not all sunshine and smooth flying. Delta recently missed analyst consensus targets and sunk 4% after admitting the airline was “pushed too hard” with the increased demand. American Airlines fell 7.4% and United lost 10.4% after their second quarter results highlighted their inability to keep up with demand and the increased disruptions that go with it. Qantas has also struggled lately, resorting to pleading with their usually office-tied employees to get their hands dirty on the tarmac as staff shortages plague productivity.

We are also beginning to hear talk of mergers between airlines in the industry, as those with healthy books look to take advantage of some potential bargains. In the US, JetBlue is looking to acquire Spirit after a deal with Frontier Airlines fell through. Time will tell whether further consolidation in the industry is required as the pipeline of capital expenditure may be fiscally insurmountable for some.

Investor beware though – airlines are notoriously volatile and can be rough investments. So much so, Warren Buffett has been outlandishly critical of their history of bankruptcies and destruction of shareholder value. Another key concern for the industry is whether high-margin business travel will ever return to the pre-pandemic level. With the rise of prominence of work from home and the ease of online meetings, some analysts are worried we will never return to peak aviation capacity and demand. And if Covid wasn’t bad enough, the war in Ukraine coupled with rampant inflation has led to a large increase in oil and fuel prices. This is hurting the consumer's back pocket more than anything, and we are seeing a fairly sizeable increase in ticket prices to help negate the increased costs of the airline’s operations.

All in all, the return of passengers in their droves has been a welcome reprieve for airlines. The wheels are moving again in an industry that has been largely dormant for the better part of two years, yet the question remains around the outlook for the industry. Profit margins are being pressured by staff shortages and rising commodity prices, creating uncertainty about whether the industry is actually facing tailwinds or headwinds. The flight path ahead for investors may be a bumpy one, so if you’re brave enough, you better fasten your seatbelt.

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