In March, investors sold off airline stocks as there were growing indications that the economic and fiscal policy uncertainties were finally having an impact on consumers’ propensity to spend money on experiences and travel.
Furthermore, since consumer spending still accounts for almost two-thirds of the US economy, any indication that consumers are cutting back on their spending is a red flag for future economic expansion.
Following several airlines lowering their earnings projections, investor sentiment toward airline stocks has drastically changed in recent weeks. A decrease in leisure travel, concerns about aircraft safety, and a reduction in government travel after cuts by the so-called Department of Government Efficiency were some of the reasons given for the decreases.
Government data indicating that consumer mood dropped to its lowest level in over two years in March supported the lower outlooks.
Delta Air Lines Inc.’s (DAL) stock fell 27.5% in March, making it the largest decliner in the S&P 500 index during that period. Who’s the next worst performer? That is the 26.4% drop in the stock of competing airline United Airlines Holdings Inc. (UAL).
United’s stock closed at a record in mid-January after rising 135.3% in 2024, while Delta’s stock hit a record high in early February after rising 50.4% in 2024.
In the meantime, the U.S. Global Jets ETF JETS experienced its worst month since it fell 19.4% in June 2022, when fears of a recession were running high, with a 15% decline in March. The S&P 500 fell 5.8% this month in contrast.
Reduced government spending on travel may be due to DOGE-related job and cost cuts, but more concerning is United’s claim that government weakness “bleed over” to leisure travel spending in the United States.
Conor Cunningham, an analyst at Melius Research, pointed out that about 80% of airline passengers go for leisure, so that’s definitely a worry for the airlines.
According to Cunningham, leisure travelers have historically been “more resilient in the desire to vacation,” thus this decline in consumer expenditure on air travel may be a sign of more serious economic issues.
They may reduce their expenditure by “trading down” to less expensive flights and places, but they will still travel even if they are concerned about the state of the economy. Furthermore, there are grounds to think that, for the time being, lowering prices will be sufficient to boost demand.
One of the reasons, according to Cunningham, is that statistics indicate that customers will continue to travel as long as they are not concerned about their jobs, regardless of economic concerns. And the economy’s silver lining has been that the jobless rate has been historically low in spite of all the uncertainties.
Although Cunningham pointed out that the majority of current DOGE-related job losses are still occurring in the Washington, D.C., region, it is anticipated that the effects will spread as the cuts affect government-dependent companies.
According to Cunningham, lowering ticket prices could not be sufficient to boost demand if the government’s March jobs report, which is due out on April 4, reveals yet another increase in unemployment.
“[T]hose that have the means and the willingness to travel, likely already have,” Cunningham stated. Because of this, it would be a “tough environment” for airlines to operate in.
Home builder Lennar Corp. (LEN) recently stated that job security concerns are starting to affect other industries that deal with consumers.
Lennar Co-Chief Executive Stuart Miller stated, “Until recently, consumers have been generally confident that they will remain employed and their compensation is safe,” according to an AlphaSense transcript of an earnings call held on March 21. “But more recently, even that safety has been called into question, as somewhat confused consumers and wavering consumer confidence have challenged the consumers’ desire and ability to transact.”
This makes the March jobs numbers even more significant. It is currently anticipated that unemployment will stay at 4.1% and that 140,000 jobs will be generated, down from 151,000 in February.
