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Daily Intelligence Briefing

Wednesday, April 26, 2023

Identifying Change-Driven Investment Themes

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.


I. Today’s Thematic Investment Idea

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

Airlines’ Summer Bookings On the Rise, But Capacity Remains a Key Question Among Several Carriers

Summary: Airlines are bracing for what could be a record summer of travel volume. That seems like good news at first glance, but the financial performance of airlines is not only reflective of demand for flights. In fact, it is equally important how efficiently the airlines can service that demand. Staffing has been a persistent problem for carriers and airports alike, despite a large hiring spree in late 2022. Last summer saw significant growth in airport traffic, but a mass of delays and cancellations, which affected a quarter of all US flights, dented airlines’ profitability and stock prices.


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

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According to the Transportation Safety Administration’s (TSA) airport checkpoint data, the number of airline passengers in the month of April is tracking very closely with pre-pandemic levels. In fact, the number of passengers screened by the TSA has surpassed traffic from the same date in 2019 across 13 of April’s 25 recorded days, thus far. This seems to be very positive news for airlines and the trend is likely building toward a record summer for air travel. As TSA head David Pekoske recently told Bloomberg, US airline passenger levels this summer are projected to be “comfortably above” pre-pandemic numbers.


That lines up well with Delta Airlines’s expectations, as President Glen Hauensteinnoting disclosed in the company’s most recent earnings call that “record advance bookings for the summer” would push Delta’s revenues 15% to 17% higher on capacity growth of 17% YoY. In the first quarter, the airline was selling 81% of available seats, which was up from 75% in 2022. One other key factor mentioned specifically by Hauensteinnoting was international travel. “We’re growing our international seats by more than 20% in the June quarter compared to the prior year, and we already have about 75% of our bookings on hand,” he stated.


JetBlue reported their earnings just yesterday, highlighting record first-quarter revenue of $2.328 billion, up from $1.736 billion a year ago, and just above the FactSet consensus of $2.317 billion. Though the carrier reported a first-quarter net loss of $192 million, or a loss of -$0.58 per share, that was much better than the same quarter in the year prior. JetBlue CEO Robin Hayes noted that they expect “strong revenue growth to continue” in Q2.


While rising bookings signal increased demand for air travel, that hasn’t always been met with enhanced performance of airline shares; particularly last summer when traveler volumes far outpaced the capacity carriers were ready to handle. That caused delays or cancellations to affect a quarter of all US flights during the summer season of 2022, which were so severe that they promoted legislators to call for tighter regulation on airlines to minimize fees and disruptions. As the Financial Times notes, FlightAware data showed Southwest Airlines was forced to cancel or delay 32% of its flights last summer. American Airlines was not far behind at 30%.


Things are expected to be different this summer, however. As MRP noted back in November 2022, a hiring spree in the aftermath of last summer’s travel chaos helped airlines surpass 2019 staffing levels, according to Airlines for America (A4A). Still, Axios writes that this summer will be another stress test for airlines, following a somewhat subpar showing during the winter Holiday Season.


Department of Transportation (DoT) data showed that just 69.1% of domestic US flights departed on time in December 2022. That figure is generally between 75%-80% in a typical month, but Southwest Airlines’s particularly poor management was largely to blame for the underperformance, canceling some 16,000 flights in the month amid staffing issues. That breakdown likely cost the airline $1 billion and is now being investigated by the DoT. Some airports like New York’s John F. Kennedy (JFK) and LaGuardia (LGA) airports continue to struggle with shortages of air traffic controllers, but airlines have communicated awareness of these issues and plan to take action to avert traffic and avoid issues with disruptions.

THEME ALERT – LONG Travel & Leisure

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 significant surge in cases. That undoubtedly delayed a rebound in travel and injected uncertainty into the timetable for airlines and related industries to recover. However, nearly all major economies around the world finally dropping restrictions for foreign visitors, it appears consumers may be resuming well-overdue vacation planning.


One of the more interesting international markets to watch will be China’s. Delta resumed nonstop services between China and the US on March 3, following a shutdown of those routes in early 2020, amid the outbreak of the COVID-19 pandemic. American Airlines and United Airlines, which had also suspended nonstop service to China nearly three years prior, restored the operation of direct flights between the US and China in the first quarter as well. Even with re-openings of previously shuttered routes between the two countries, the number of flights between traversing between each of them remains just a fraction of what it was prior to the pandemic. Per Fitch Ratings, only 2.24 million international passengers were serviced by China’s airports in the first quarter or 12% of the 2019 level. However, an increase in Chinese passenger volume abroad would likely indicate a revival in travel spending.


Moreover, it would provide a strong signal for the recovery of Chinese tourism across the globe. As MRP has previously noted, a return of Chinese travelers to the international scene, following the end of the “Zero-COVID” regime in the world’s second largest economy, should bolster travel significantly. For context, 2019 saw 155 million Chinese travelers go abroad, spending $254.6 billion. China averaged about 12 million outbound air passengers per month in 2019, but those numbers fell 95% during the COVID years, according to Steve Saxon, a partner in McKinsey’s Shenzhen office. Per CNN reporting, he predicts that figure will recover to about 6 million per month by the summer.


To track this theme, we use the Defiance Hotel, Airline, and Cruise ETF (CRUZ), which structures its holdings to to track the performance before fees and expenses of the BlueStar Global Hotels, Airlines, and Cruises Index, a rules-based weighted index of companies primarily engaged in the passenger airline, hotel and cruise industries.  Since adding LONG Travel & Leisure to our list of themes, CRUZ has returned -15%, underperforming the S&P 500 decline of -2% over that same period.


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