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Daily Intelligence Briefing

Wednesday, June 1, 2022

Identifying Change-Driven Investment Themes


I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

The Daily Intelligence Briefing is published by McAlinden Research Partners. The report is provided to Hedge Connection blog readers once per week for free. Below is just one of the five sections that delivers Change-Driven Investment Themes everyday.

Airfares Soar Into the Summer as Airlines Project Sales to Surpass Pre-Pandemic Levels

Summary: Several US airlines expect to collect the strongest revenues they’ve seen in years throughout 2022, with many forecasting sales that handily outpace pre-pandemic 2019 levels. Though Memorial Day weekend was a bumpy ride that resulted in more than 2,500 canceled flights across the country, airport terminal traffic was up by nearly a quarter over the same period in 2021.

Higher fares have not deterred planes from being packed, helping airlines offset rising energy costs. While inflation is up by 8% in the US YoY, airfare prices have risen 25%. Data from Bank of America and Allianz project massive gains in travel spending over the prior year as pandemic-weary Americans commit to much-needed getaways at any cost.

Related ETFs: Defiance Hotel, Airline, and Cruise ETF (CRUZ), U.S. Global Jets ETF (JETS)

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Last weekend marked the traditional start of the summer travel season in the US as Monday’s Memorial Day holiday meant a 3-day weekend for most Americans.

Transportation Safety Administration (TSA) checkpoint data indicates nearly 8.8 million travelers passed through airport security in the US between last Friday and this Monday (May 27 – May 30), a 23.5% gain YoY, but about 9.8% short of 2019 levels during the same span.

It was a rough weekend for some carriers as bad weather in key destinations like Florida and New York, as well as staffing shortages, led to more than 2,500 flight cancelations over that four-day period. While that news stole some of the headlines, the bigger picture is a much brighter one for airlines as they head into the summer months.

Last month, International Air Transport Association (IATA) Director General Willie Walsh told Reuters that overall passenger traffic was picking up faster than expected and “very strong bookings” will help the industry recover to pre-pandemic passenger traffic in 2023. Walsh has also sounded the alarm on pilot shortages in the US, but stressed it was not a global phenomenon and that it would be addressed. He also remarked that high oil prices, beyond the $100 mark, have been dealt with before by airlines and those costs would largely be passed onto passengers.

To this point, US airlines have managed to do just that. Though inflation has surpassed the 8% mark in consecutive months now, according to the CPI, price growth for airline tickets is far surpassing that headline number. CNBC notes that, in the last year, the consumer price index for airline tickets has shot up by 25% — the largest jump since the Federal Reserve of St. Louis began tracking the index in 1989. In April alone, airfares spiked 18.6%. That has not stopped Americans from getting airborne, however, as a recent Bank of America Institute survey showed spending at airlines and travel agencies is up 60% YoY.

Higher fares and full planes have helped airlines offset rising energy costs, which is usually a major drag on profitability for airlines. Though cost per gallon of fuel is at an 8-year high for airlines, it does help that airlines expect to drive higher revenues versus 2019 while using 10% less fuel thus far in 2022, according to Bureau of Transportation statistics.

Bloomberg notes that Southwest Airlines Co., United Airlines Holdings, and JetBlue Airways Group each strengthened their revenue outlook for this quarter recently, citing strong summer travel demand.

Southwest expects revenue to come in as much as 15% above pre-pandemic levels in 2019, up from an earlier outlook for growth of up to 12%. Southwest has helped itself immensely by being one of the only US-based airlines to hedge their fuel costs – that is, making agreements to purchase fuel in the future at a predetermined earlier price. Per Axios, Southwest says it’s approximately 64% hedged for the rest of 2022.

Per Reuters, United now expects total revenue per available seat mile to surge 23%-25% from the same period in 2019, up from a prior forecast of 17%. Additionally, the airline has said it expects to generate the highest quarterly revenue in its history in Q2, helping it return to profit.

JetBlue now sees revenue “at or above” the high end of its previous guidance for growth of as much as 16%. The carrier is currently pursuing a massive expansion of its business via an attempted acquisition of budget carrier Spirit Airlines. CNBC notes JetBlue currently has a stronger offer than Frontier Airlines, putting $3.6 billion in cash on the table for a purchase price of $30 per share, but Spirit would have to renege on their previous agreement with Frontier’s offer of just $22.31 per share, which seems unlikely at this point. 

As MRP noted in April, American Airlines is seeing the strongest demand for flights on record, and rising jet fuel costs have been passed on to the consumer with no subsequent slowdown in bookings. American Airlines reported that their total business travel is about 80% recovered compared to 2019 levels, with small and midsize business revenue approaching a full recovery, per Travel Weekly. Revenue from large corporate clients is only 50% recovered, yet corporate bookings are at their highest rate since the onset of the pandemic. The company expects overall business revenue to be 90% recovered in the second quarter.


MRP added LONG Travel & Leisure to our list of themes on September 29, 2021, as it appeared likely a full recovery in 2022 awaited the travel industry. Unfortunately, just weeks after this was added to our list of themes, the new COVID-19 Omicron variant was discovered, which led to an astronomical surge in cases. However, after peaking in January, cases have plummeted and consumers look ready to resume well-overdue vacation planning, which should be a boon for the travel sector.

Though booming energy prices are raising the cost of travel, demand for travel and leisure appears to have become relatively inelastic with so many vacations having been delayed over the past few years of the pandemic era. Americans are projected spend a record-breaking $194 billion on summer travel in 2022, according to Allianz Partners USA’s 14th annual Vacation Confidence Index, a 26% increase over last year’s spend and a 91% increase compared to pre-COVID spending in the summer of 2019.

Since adding LONG Travel & Leisure to our list of themes, the Defiance Hotel, Airline, and Cruise ETF (CRUZ) has returned -16%, thus far underperforming the S&P 500 return of -5% over that same period.


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