Teresa Rivas

Airline investors probably feel like they're being selected for additional screening when they're already running late for a flight to safety at the far end of the terminal.

Turns out it's one thing after another for airlines, too.

For nearly as long as planes have been in the air, they've been taking off with investors' money, and often returning with peanuts. The industry's bad reputation was one of the few nearly universally accepted truths on Wall Street. Warren Buffett famously called them a death trap, while Richard Branson quipped that the easiest way to be a millionaire was to start as a billionaire, and launch an airline.

That was supposed to change decades ago, with airline consolidation--since the 1960s, more than 40 carriers were acquired by the industry's biggest players--which would theoretically give companies greater scale and pricing power, but those tailwinds didn't really materialize.

That's because airlines had to deal with numerous setbacks--from the introduction of ultra-low-cost carriers to the rise of the internet, which allowed consumers to shop around for deals--that weighed on airfares. Then the industry was hit with two major crises in less than a decade: 9/11 and the Great Recession, both of which spawned airline bankruptcies.

All that looked like it might finally change in the 2010s: In the latter part of the past decade airlines began to be more responsible with their cash and were less trigger happy with price wars, expanding capacity at a moderate clip and notching growing margins. Even Warren Buffett had done a 180 and was buying airline stock.

One analyst warned that the real test would come when airlines faced a rainy day, and sure enough, a monsoon arrived in 2020 in the form of Covid-19, which caused travel to come to a standstill. That wasn't the airlines' fault, but fair or not, it deflated the bull case for carriers. Buffett sold his entire stake of the nation's four largest airlines--legacy carriers American Airlines Group, Delta Air Lines, and United Airlines Holdings, along with Southwest Airlines-- at a loss.

Yet in the past few months it's been like déjà vu all over again. Travel demand bounced back quickly postpandemic--global flights were just a hair's breadth below 2019 levels in 2024--and analysts were getting bullish on the Big Three once more, as their bottom lines benefit from ongoing strong demand and trouble and their discount rivals. United and Delta even outperformed the Magnificent Seven in 2024.

Then Trump and tariffs happened.

Between zigzagging policy that's left the market guessing about a potential trade war, softening economic data, shaky consumer confidence, and mass federal layoffs, investors' faith in U.S. growth and the rally has plummeted in the past month. Businesses and regular Americans are in many cases hanging back to see how it all pans out.

All that is hurting airlines--again. Former high flyers Delta and American both lowered their first quarter profit expectations this week, as did already troubled Southwest. Wild weather and high-profile accidents were part of the problem, but so were cracks in demand for leisure and business travel.

"With travel a discretionary item for many consumers and businesses, the airlines tend to be a good current indicator of consumer sentiment," writes Gimme Credit's Jay Cushing. "The weakness in demand appears to have accelerated over the past couple of weeks with a drop in close-in bookings reflecting potential concerns about the U.S. economic outlook. We expect some of the underperformance in the quarter to be transitory (weather and accidents), but prolonged tariff uncertainty and signs of a slowing economy point to a more challenging backdrop for the highly cyclical airline sector in 2025."

The sudden about face was a surprise to many, given hopes that strength in other regions, and falling jet-fuel prices would soften the blow. However, like so many other industries, stocks are trading more on fearful sentiment than anything else.

Morgan Stanley analyst Ravi Shanker acknowledged as much on Friday: He trimmed his airline estimates following the first-quarter warnings. While he's still encouraged by management commentary and survey work showing stable travel intentions, Shanker notes that if the macro backdrop "deteriorates to the point where a consumer recession appears inevitable...airline stocks could be tough to own, even if the consumer keeps prioritizing air travel over other spending modes."

In fact, earlier this week Bernstein's David Vernon noted that "fear is pushing share prices down faster than the pace of expected revisions." He's still bullish on the sector and argues this is a chance for airlines to show their mettle in terms of self-regulating capacity and producing durable earnings. "Getting through this soft patch won't be easy, but it's hard to believe that the industry will abandon logic and try to grow its way out of the problem."

Believing logic will rule the day may be idealistic in 2025. But it is Pi Day; maybe there is some room for pie-in-the-sky thinking.

Write to Teresa Rivas at teresa.rivas@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

March 14, 2025 12:44 ET (16:44 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.