With the pandemic firmly in the rear-view mirror, consumers are ever keener to redeem their pile of airline miles on other travel rewards on their credit cards for new experiences through “revenge travel.” Revenge travel has its origins in “baofuxing xiaofei” or “revenge spending,” an economic trend that originated in 1980s China when a growing middle class had an insatiable appetite for foreign luxury goods.

Since e-commerce, albeit with a few hiccups in the supply chain, was able to satiate the appetite for goods through the pandemic, Americans are now going above and beyond to compensate for the years spent indoors trying to substitute real experiences with virtual ones.

The trend is expected to gain further momentum with the relaxation of restrictions on international travel that were put in place by China as part of its strict and controversial “Zero-Covid” policy. Consequently, air traffic between the U.S. and China is expected to double in volume by the end of October.

According to an order by the U.S. Transportation Department, each country will gain an additional six weekly round-trip flights as of September 1, up from the current 12, with the total number of flights for each nation planned to rise to 24 by October 29.

In this context, here are three U.S airlines that stand to benefit the most from the persistent tailwind:

On July 13, Delta Air Lines, Inc. (DAL) reported record revenues and earnings for the fiscal second quarter driven by strong demand for international travel, premium seals, and a 22% decline in fuel expenses. The Atlanta-based airline’s adjusted revenue and EPS came in at $14.61 billion and $2.68, compared to consensus estimates of $14.49 billion and $2.40, respectively.

Given that airlines conduct the bulk of their business in the second and third quarters, DAL hiked its 2023 earnings forecast to an adjusted $6 to $7 a share, up from its previous estimate at the high end of a $5 to $6 per share range.

United Airlines Holdings, Inc. (UAL) has also been on a purple patch which has seen the carrier posting record quarterly earnings and forecast a strong third quarter amid an unprecedented domestic and international travel boom.

The carrier’s total revenue came in at $14.18 billion, compared to consensus estimates of $13.91 billion. Its net income came in at $1.08 billion, which resulted in an adjusted EPS of $5.03 for the quarter that surpassed Street expectations of $4.03.

International flights made up 40% of the revenue, but the segment is growing faster than domestic ones amid the overdue relaxation of strict Covid restrictions overseas. 

Despite ten consecutive interest-rate hikes by the Federal Reserve, it isn’t difficult to connect the dots and understand why American Airlines Group Inc. (AAL) has had to turn to bigger airplanes, even on shorter routes, and jumbo-jets, such as the Boeing 747 and the Airbus A380, are being brought back to help ease airport congestion and work around pilot shortages.

As a result of this tailwind, AAL’s revenue for the fiscal second quarter topped analyst estimates to come in at a record $14.06 billion, up 4.7% year-over-year. With the airline’s executives bullish on travel demand, particularly for international trips, the operator has raised its earnings outlook for the fiscal year 2023.

Dark Clouds Around the Silver Lining

If something cannot go on forever, it will stop.” The obviousness of this observation made by Herb Stein was what made it famous.

Amid widespread convictions that pent-up demand for travel will be a multi-year demand set, it is easy to get carried away by the “pent-up demand” and “revenge travel” narrative.

However, the rise of remote work and virtual teams, facilitated by contemporary collaboration and productivity tools, seems to have become an immune and immutable remnant of the cultural sea-change our work and lives had to adopt and adapt to during the pandemic, new reports give us reasons to doubt whether business travel is ever going back to normal.

In such a situation, with traveling for leisure being an occasional indulgence in most of our lives, there are risks that the pent-up demand might not be enough to sustain the momentum that is propelling the growth performance of DAL and other airlines, which are primarily in the business of ferrying passengers.

Moreover, with ticket prices at all-time highs and the stash of pandemic stimulus cash, fueling the leisure travel boom expected to run out over this quarter, it is unsurprising to find tricks and trends, such as ‘skip-lagging’ and consumers trading down on travel being on the rise.

Across the Pacific, with the Chinese economy currently battling triple threats of deflation, chronically high youth unemployment, and an ever-intensifying real-estate debt crisis, it could be unrealistic to expect any appreciable recovery in overseas travel demand among the aging, shrinking, and deurbanizing Chinese population that’s holding on to its savings for dear life amid macro-economic uncertainties that could bring about a lost decade.

Moreover, geopolitical relations between the U.S. and China have been souring because of differences regarding the latter’s territorial claims. The trade war between the two superpowers is intensifying amid restrictions on exports of semiconductor chips and investments in other cutting-edge technology by the former, and the latter upping the ante won’t help matters either as far as civil aviation between the two countries is concerned.

Bottomline

While U.S. air carriers and their Chinese peers would want nothing more than for passenger demand to stay strong and, perhaps, keep growing, the most likely case would be a return to seasonality and cyclicality, as is typical of the airline industry.

However, the possibility of passenger demand falling off a cliff and investors rushing for the exits only to find that the clock struck midnight and the chariot turned back to a pumpkin can’t be completely ruled out.

Either way, every flight that takes off has to land at some point. However, amid widespread tail risks, investors, both current and prospective, would be wise to fasten their seatbelts because the skies ahead are anything but clear.



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