Stormy outlook clearing for travel stocks and airlines

Several US airlines rallied more than 8% overnight after encouraging guidance upgrades and a sharp reversal in oil prices.

Local airlines and travel stocks have followed suit, with names like Corporate Travel Management (ASX: CTD) and Qantas (ASX: QAN) up 5% and 3% respectively.

Oil prices come back to earth 

Oil prices fell as fast as it went up, down almost -30% from last Monday’s highs of US$138 a barrel. 

Brent Crude Oil 12-month chart (Source: TradingView)

Notable drivers for the sharp reversal include:

• A new wave of covid in China resulting in severe lockdowns

• European leaders showing support for Ukraine’s independence

• India purchasing Russian oil

• Weak US manufacturing data

Airlines can breathe a sigh of relief as oil prices finally take a breather after running from just US$70 a barrel in mid-December.

"WTI crude should find support ahead of the US$90 level, but if China’s lockdown spreads much further, the mid-US$80s would not be that hard to reach," said Oanda senior market analyst, Ed Moya.

US airlines poised to bounce back

Earnings updates from major US airlines have reassured investors that the travel industry’s comeback narrative remains intact. 

Delta Air Lines said that its bookings are ahead of 2019 figures, with the airline reporting its highest ever ticket sales last week. From a revenue perspective, Delta expects first-quarter sales to be roughly 78% of 2019 (pre-covid) levels.

“We are very, very confident of our ability to recapture over 100% of the fuel price run-up in the second quarter and through probably the end of the summer,” said Delta President Glen Hauenstein, CNBC reported. 

Likewise, American Airlines said it expects first-quarter revenue to be 17% off 2019 levels and United Airlines expects the 2020 schedule to be down around high single digits compared to 2019. 

Implications for local travel stocks

The optimistic outlook is in-line with Qantas' view that Group domestic capacity should return to 90-100% of pre-covid levels by the fourth quarter of FY22.

International travel was a lessor contributor to Qantas' overall earnings, accounting for 19.2% of Group earnings in FY19.

A strong recovery in US travel is arguably more important for travel booking companies like Flight Centre (ASX: FLT), Webjet (ASX: WEB) and Corporate Travel Management.

In FY19, the Americas region contributed roughly one third of Flight Centre's profit before tax.