BofA points to four key tailwinds that could help the airline industry in the coming months. These factors are worth paying attention to for those who might have written off the sector too soon:<\/p>\n\n\n\n
1. Steady TSA Throughput Despite Lower Capacity<\/strong><\/h5>\n\n\n\nData from the Transportation Security Administration (TSA) shows that flight demand has remained strong, despite airlines reducing their overall capacity. This is crucial because it indicates that people are still flying even though airlines are offering fewer seats. Less capacity combined with solid demand is typically a recipe for improved pricing power, which can support earnings.
Today, the TSA regularly clears over 2.5 million people to fly every day, exceeding pre-pandemic figures, and in July, a new record was set when 3 million passengers were screened in a single day.<\/a> As you can see below, passenger volumes in the U.S. now regularly exceed pre-pandemic levels.<\/p>\n\n\n\n![\"\"](\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\")
<\/figure>\n\n\n\nPast performance is not indicative of future results<\/strong><\/p>\n\n\n\n2. Decelerating Domestic Capacity<\/strong><\/h5>\n\n\n\nU.S. airlines are cutting back on domestic capacity. Why? The oversupply of seats during the summer months led to lower fares and compressed margins, even though travel demand was strong. By trimming capacity, airlines can drive up fares without chasing customers away. It\u2019s a classic supply and demand play, and if demand holds steady, we could see a nice bump in revenue for airlines, especially as we move into the fall<\/p>\n\n\n\n<\/figure>\n\n\n\n3. Lower Fuel Prices Boosting Earnings<\/strong><\/h5>\n\n\n\nFuel is one of the biggest expenses for airlines, accounting for 20% to 30% of their total costs. After a period of rising fuel prices, we\u2019re now seeing some relief, which is great news for the airline industry<\/p>\n\n\n\n<\/figure>\n\n\n\nPast performance is not indicative of future results<\/strong><\/strong><\/p>\n\n\n\nBofA has raised its earnings estimates for several airlines, including United and Alaska Airlines, due to recent declines in fuel prices. Lower fuel costs, combined with higher ticket prices, could help airlines retain profitability and possibly beat earnings expectations in the fourth quarter.<\/p>\n\n\n\n
4. Seasonal Outperformance In The Fall<\/strong><\/h5>\n\n\n\nHistorically, airlines tend to outperform in the fall. According to BofA\u2019s analysis of the Dow Jones U.S. Airlines Index since 2000, the second half of the year has typically been the stronger half for airlines. The industry has outperformed the S&P 500 in three of the last six months of the year\u2014namely September, October and November. If history is any guide, investors who get in now could see some attractive returns by the end of the year.<\/p>\n\n\n\n<\/figure>\n\n\n\nPast performance is not indicative of future results<\/strong><\/p>\n\n\n\nAirlines Are Playing The Long Game<\/strong><\/h3>\n\n\n\nBeyond the immediate tailwinds, the airline industry is positioning itself for long-term success. Carriers have been using their cash flow to make critical investments, such as expanding their workforces, renewing their fleets and upgrading their IT systems.<\/p>\n\n\n\n
And they\u2019re doing this while paying down debt. U.S. airlines had $143 billion in debt on their books at the end of 2023, down from $168 billion at the end of 2021, according to BofA. That\u2019s still higher than pre-pandemic levels, but it\u2019s a significant improvement and a sign that the industry is serious about managing its balance sheets.<\/p>\n\n\n\n
Airlines are also retiring older, less efficient aircraft and replacing them with newer, more fuel-efficient models, which should help reduce operating costs even further. In March, American announced it would be purchasing 260 new aircraft<\/a> from Boeing, Airbus and Embraer to meet growing demand. This came after United\u2019s October 2023 announcement that it would be buying 110 aircraft from Boeing and Airbus.<\/a><\/p>\n\n\n\nAirlines Adjusting To New Realities<\/strong><\/h3>\n\n\n\nAs much as we love to think about air travel as a simple business of getting people from point A to point B, it\u2019s a lot more complicated than that. Airlines need to strike a balance between offering enough seats to meet demand and keeping prices high enough to make a profit.<\/p>\n\n\n\n
Delta, for example, moderately raised its full-year expectations to\u00a0between $5 to $7 per share,<\/a>\u00a0despite some challenges earlier in the year, including the CrowdStrike hack. Alaska has also\u00a0raised its earnings outlook<\/a>\u00a0thanks to strong summer demand and lower fuel costs. Even budget carriers like Frontier are seeing\u00a0better-than-expected margins<\/a>\u00a0on capacity cuts.<\/p>\n\n\n\n—<\/p>\n\n\n\n
Today, the TSA regularly clears over 2.5 million people to fly every day, exceeding pre-pandemic figures, and in July, a new record was set when 3 million passengers were screened in a single day.<\/a> As you can see below, passenger volumes in the U.S. now regularly exceed pre-pandemic levels.<\/p>\n\n\n\n
![\"\"](\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/09\/COMM-tsa-passengers-09132024.png\")
<\/figure>\n\n\n\nPast performance is not indicative of future results<\/strong><\/p>\n\n\n\n U.S. airlines are cutting back on domestic capacity. Why? The oversupply of seats during the summer months led to lower fares and compressed margins, even though travel demand was strong. By trimming capacity, airlines can drive up fares without chasing customers away. It\u2019s a classic supply and demand play, and if demand holds steady, we could see a nice bump in revenue for airlines, especially as we move into the fall<\/p>\n\n\n\n Fuel is one of the biggest expenses for airlines, accounting for 20% to 30% of their total costs. After a period of rising fuel prices, we\u2019re now seeing some relief, which is great news for the airline industry<\/p>\n\n\n\n Past performance is not indicative of future results<\/strong><\/strong><\/p>\n\n\n\n BofA has raised its earnings estimates for several airlines, including United and Alaska Airlines, due to recent declines in fuel prices. Lower fuel costs, combined with higher ticket prices, could help airlines retain profitability and possibly beat earnings expectations in the fourth quarter.<\/p>\n\n\n\n Historically, airlines tend to outperform in the fall. According to BofA\u2019s analysis of the Dow Jones U.S. Airlines Index since 2000, the second half of the year has typically been the stronger half for airlines. The industry has outperformed the S&P 500 in three of the last six months of the year\u2014namely September, October and November. If history is any guide, investors who get in now could see some attractive returns by the end of the year.<\/p>\n\n\n\n Past performance is not indicative of future results<\/strong><\/p>\n\n\n\n Beyond the immediate tailwinds, the airline industry is positioning itself for long-term success. Carriers have been using their cash flow to make critical investments, such as expanding their workforces, renewing their fleets and upgrading their IT systems.<\/p>\n\n\n\n And they\u2019re doing this while paying down debt. U.S. airlines had $143 billion in debt on their books at the end of 2023, down from $168 billion at the end of 2021, according to BofA. That\u2019s still higher than pre-pandemic levels, but it\u2019s a significant improvement and a sign that the industry is serious about managing its balance sheets.<\/p>\n\n\n\n Airlines are also retiring older, less efficient aircraft and replacing them with newer, more fuel-efficient models, which should help reduce operating costs even further. In March, American announced it would be purchasing 260 new aircraft<\/a> from Boeing, Airbus and Embraer to meet growing demand. This came after United\u2019s October 2023 announcement that it would be buying 110 aircraft from Boeing and Airbus.<\/a><\/p>\n\n\n\n As much as we love to think about air travel as a simple business of getting people from point A to point B, it\u2019s a lot more complicated than that. Airlines need to strike a balance between offering enough seats to meet demand and keeping prices high enough to make a profit.<\/p>\n\n\n\n Delta, for example, moderately raised its full-year expectations to\u00a0between $5 to $7 per share,<\/a>\u00a0despite some challenges earlier in the year, including the CrowdStrike hack. Alaska has also\u00a0raised its earnings outlook<\/a>\u00a0thanks to strong summer demand and lower fuel costs. Even budget carriers like Frontier are seeing\u00a0better-than-expected margins<\/a>\u00a0on capacity cuts.<\/p>\n\n\n\n —<\/p>\n\n\n\n2. Decelerating Domestic Capacity<\/strong><\/h5>\n\n\n\n
![\"Schedules](\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/09\/COMM-airline-capacity-09132024.png\")
<\/figure>\n\n\n\n3. Lower Fuel Prices Boosting Earnings<\/strong><\/h5>\n\n\n\n
![\"Brent](\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/09\/COMM-brent-crude-09132024.png\")
<\/figure>\n\n\n\n4. Seasonal Outperformance In The Fall<\/strong><\/h5>\n\n\n\n
![\"Airline](\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2024\/09\/COMM-airline-stocks-09132024.png\")
<\/figure>\n\n\n\nAirlines Are Playing The Long Game<\/strong><\/h3>\n\n\n\n
Airlines Adjusting To New Realities<\/strong><\/h3>\n\n\n\n