Friday, March 10, 2023
- The shift of consumer spending from goods to services has helped revive travel demand. This trend likely has staying power.
- Flight bookings have tripled over the last few years, with leisure travel now back above pre-pandemic levels.
- Load factors, which reflect the percentage of available seats an airline sells on a flight, have climbed to their highest levels since 2019.
- The outlook for airline industry revenues and earnings remains bullish.
- The technical setup for airline stocks points to further outperformance ahead.
After a turbulent descent during the pandemic, the airline industry is finally showing signs of recovering. The transition of consumer spending from goods to services has helped revive travel demand. This trend likely has staying power. According to LPL Research Chief Economist Jeffrey Roach, the share of services spending is still roughly 2.5 percentage points below pre-pandemic levels, meaning consumers would need to spend $450 billion on services to normalize the composition of goods and services spending (see the latest Weekly Market Commentary for more details).
Scheduled Flights are Taking Off
The shift to services spending is evident in scheduled flight data. The chart below highlights the number of scheduled flights booked from May 2020 to August 2023, broken down by all global flights and flights within North America. During this timeframe, scheduled flight bookings for both geographic segments have more than tripled.
Recovering at a Leisurely Pace
Leisure travel bookings have been a major diver of the recovery in airline demand. The chart below depicts the variance in the total number of leisure and corporate airline tickets purchased compared to the same period in 2019. For example, if the total number of leisure travel tickets sold in December 2019 was 100,000 and the total number of leisure travel tickets sold in December 2022 was 125,000, the leisure line would be at +25%. As highlighted below, the number of leisure travel tickets sold has fully recovered from the pandemic and is now back above 2019 levels. The total number of corporate tickets sold is trending in the right direction but remains 26% below bookings in 2019.
Flight Path to Profitability
So consumers are spending more on services and flying more—but are airlines making money? The short answer is yes, based on an improving trajectory of available seat miles (ASM) and revenue passenger miles (RPM). ASM represents the total miles of a flight multiplied by the number of available seats on the flight, which ultimately equates to the airplane’s carrying capacity. RPM represents the number of paying passengers on a flight multiplied by the total miles of the flight. If you divide the RPM by ASM you get the load factor, which reflects the percentage of available seats an airline sells on its flight. The higher the load factor the better the airline is at selling seats and generating revenue.
The chart below highlights the ASM, RSM, and load factor trends for the broader airline industry. All three metrics are trending higher, including the load factor, which recently reached its highest level since 2019 (the load factor non-normalized reached 83.5% at the end of 2022).
The improving load capacity is also showing up in estimates. For the S&P Composite 1500 Airlines Index, sales are expected to climb 28% in both 2023 and 2024, with earnings expected to more than double in 2023. Glen Hauenstein, President of Delta, one of the world’s largest airlines, echoed the improving industry outlook on their latest earnings call in January. Hauenstein noted, “Consumer demand remains healthy with advanced bookings significantly ahead on both yield and load factor for each month of the March quarter compared to 2019. And in our recent corporate survey, results were positive with 96% of respondents expecting to travel as much or more in 1Q than 4Q, led by financial services. In the new year, bookings reflect the survey optimism and are accelerating.”
The technical setup for the broader airline space is also improving. The S&P Composite 1500 Airlines Index, shown below, recently broke out from a bottom formation after reversing a two-year downtrend. Momentum is confirming the trend reversal, evidenced by the 50-day moving average crossing above the 200-day moving average (golden crossover) and a recent Moving Average Convergence/Divergence (MACD) buy signal. In addition, relative strength has turned bullish, as the S&P Composite 1500 Airlines Index vs S&P 500 ratio chart has formed a new uptrend, suggesting further airline outperformance ahead.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
All performance referenced is historical and is no guarantee of future results.
These charts are statistical and are not intended to provide specific advice or recommendations for any individual.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.
Not Insured by FDIC/NCUA or any government agency
Not bank/credit union deposits or obligations
Not bank/credit union guaranteed
May lose value