Why airline stocks are still lagging pre-pandemic levels

Raymond James Managing Director Savi Syth sits down with Yahoo Finance Live to break down the labor obstacles the airline industry is taking on ahead of the summer travel demand, including staffing shortages and pilot training programs as pilots negotiate wages.

Video Transcript

RACHELLE AKUFFO: Welcome back, everyone. The airline industry isn't recovering from the pandemic as fast as investors hoped. But will they ever get back to those levels? Savi Syth, Raymond James managing director, is here to help us answer that. So what are your predictions there? I mean, we've really seen that American, United, Delta, Southwest, they're all reducing flights. We're seeing now this perfect storm of summer travel fuel prices. Will they ever get back to that pre-pandemic level?

SAVI SYTH: Thanks, Rachelle. Yeah, it's a mixed story here. On the one hand, demand is extremely strong. And that's the good news. When we were in the pandemic, that was a question of, will demand come back? Will people travel again? And you're seeing that definitely on the leisure, visiting friends and relatives side. But even on the business demand side, you're seeing a nice recovery there. So that's the good news.

Unfortunately, the bad news is, fuel is high. And it's good that because demand is also strong, that you are being able to pass through that cost through the consumer. So airlines are doing well from that perspective. Operations are tougher. You are having kind of pilot supply constraints. Not necessarily supply, but just the training bottlenecks. You're needing to hire and put on a lot more pilots. And a lot of pilots are moving around.

And so that's causing airlines to maybe pull back the capacity lower than demand levels, just to make sure that they can have stable operations as you get into the summer. So it's a mixed bag right now. But generally, I would say net, net, it's fairly positive in that strong demand background. The market is worrying about what's yet to come. But as we stand today, I think it's a net positive so far for airlines.

DAVE BRIGGS: Anyone who's been in an airport recently can tell you that demand is sky high-- no pun intended there. Southwest-- you mentioned the pilot shortage-- had 1,500 pilots on the picket line this week in Dallas. Are any of the airlines protected the most or in the best position to weather that storm of the pilot shortage?

SAVI SYTH: You know, I think if you look at the supply side, the demand side, the big four had a fairly easier time of hiring pilots. That's where most pilots want to go. They all have training issues. Again, they're trying to hire a lot of pilots, so everybody has training issues. But the big four, Delta, United, American, Southwest, don't have as much issues attracting pilots. They just need to get them through into and onto planes.

And the picketing we're seeing today at various airlines, you are-- you had contracts coming up for renewal right before COVID. In 2019 and 2020, a lot of contracts were becoming amendable. And COVID put a stop to that. There was a two-year hiatus where you couldn't have those contract negotiations. And now that we're out of it, we're back to negotiations. And there's a lot of information picketing. I don't think there's any concern here that we're going to get strikes over the summer or anything like that. So it's really kind of a-- it's a couple of different issues that are kind of showing up here.

RACHELLE AKUFFO: Now as we watch that trickle down to what we're seeing with stock market performances for some of these big airlines, what are you watching there? Because that doesn't seem to be bouncing back as fast as the demand is.

SAVI SYTH: Yes, if you told me that airlines would be passing through this level of fuel price increase in such a short time, I would have expected shares to be much higher than they are today. And so, what's happening here is a kind of a disbelief that this demand is sustainable. So I think most investors believe that the summer is going to be strong. Profits over the summer is going to be strong. What they don't believe is that this demand is sustainable.

So I think the key to the stocks here are what's going to happen post-summer. Does business demand hold up? Are consumers going to stop spending as kind of the savings rates come down or as they've kind of taken their summer trips? So it's really what happens in the second half August into September and October that, I think, matters for the stocks here.

DAVE BRIGGS: And today, we're seeing a few nice bumps we saw in the share prices. But looking in terms of recent history, five-year look, United is down 30% year to date, almost 50% in the last five years. Delta's down 30%, 42% in the last five years. American, very similar, down 38% in the last year and a staggering 72% in the last five years. Will we ever get back to these pre-pandemic share prices?

SAVI SYTH: Yeah, I mean, on the one hand, you do have some airlines that have issued a lot of shares during the pandemic to raise capital. I think we can get back there. It's a matter of we need to kind of get earnings recovered. As you pointed out at the beginning, as I said, demand is strong. We're net, net positive. But earnings haven't recovered back to pre-pandemic levels. We thought we were on the way there in 2023, 2024 time frame. But now there are recession worries, so maybe that's getting pushed out.

I think for the stocks to really come back, we need to kind of get beyond these kind of concerns of demand destruction. And again, the good news is, there was a lot of questions on if business demand will be permanently affected by the new technologies outside and new ways of figuring out how to do business. But the evidence so far is that it is a positive trend. Business demand is coming back. So I think it's a matter of time that the earnings start to recover there.