Red Hot Summer for Travel and Airline Stocks: Alaska Air Faces Turbulence
The summer has been scorching for both travel enthusiasts and airline investors. However, a shift in the wind is on the horizon, and it's Alaska Air that is facing some unexpected turbulence.
Despite impressive earnings, Alaska Air's (ticker: ALK) latest update has sent shockwaves through the sector, causing major American airlines to take a nosedive on Tuesday.
Alaska Air's earnings were actually quite strong. The company, which operates Alaska Airlines and Horizon Air, even achieved a record-breaking quarterly revenue of $2.84 billion, surpassing earnings estimates.
However, it's the third-quarter guidance from Alaska that appears to be the catalyst for the sector's losses. The company anticipates revenue growth to range from flat to 3% compared to 2022—a noticeable slowdown from the 7% growth reported in the second quarter.
As a result, Alaska's stock plummeted 11% during early trading, with other well-known carriers also taking a hit, such as JetBlue Airways (JBLU) down 5.5%, Southwest Airlines (LUV) declining 5.8%, and Frontier Group (ULCC) dropping by 6%.
This guidance from Alaska may indicate a softening in travel demand, which investors and Wall Street have been concerned about for quite some time. Analysts' expectations for the full year have consistently fallen below the industry's own projections in recent months. However, with the soaring demand experienced throughout the summer, this gap has been slowly closing.
But now is not the time to panic. Domestic travel made a robust comeback last summer and continued its momentum well into the latter half of 2022. Naturally, comparisons with those periods were always going to be more challenging.
In fact, Alaska is still on track to set a new record for quarterly revenue in the third quarter. So, it would be premature to label this slight deceleration in demand as a significant setback.
The impact of a potential domestic slowdown or normalization may be more subdued for the three largest and most internationally-exposed airlines: United Airlines (UAL), American Airlines (AAL), and Delta Air Lines (DAL). The market is already reflecting this, as the trio's stock prices have only dipped between 2.8% and 4%, outperforming the greater declines seen in the low-cost, domestic-focused airlines.
To gain a clearer picture of the potential magnitude of a domestic slowdown, all eyes will be on Southwest's earnings report before the market opens on Thursday.
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