North America Airlines 2Q23 Preview

United and Frontier faced some operational headwinds, but generally strong demand and lower jet fuel should support a solid second quarter airline results season

The US travel demand has remained strong this summer, contrary to prior market fears. The 2Q23 results are expected to show solid yields and lower jet fuel prices, reflecting a strong period for the sector. However, recent operational challenges may have affected carriers such as United and Frontier. With industry capacity growth forecast to be 15% in 3Q23, demand outlooks will be crucial to maintaining favorable outcomes. Unit cost inflation is also expected to moderate, allowing for greater network and asset efficiency.

Delta's recent commentary has been supportive of a strong demand backdrop in 3Q23, with international markets expected to outperform for network airlines. Joint ventures in the North Atlantic are also expected to support relatively robust earnings and revenue outlooks from American, Delta, and United. However, the focus will likely be on United and Southwest's reversal of operational fortunes, with headwinds for Frontier in 2Q23. June was a challenging operating period for many airlines due to usual summer weather and compounding operational challenges.

Strong demand and lower jet fuel prices are expected to support still relatively strong second-quarter outcomes for United and Frontier despite cancellation rates near or above 2% in the quarter. Non-fuel unit costs are expected to be negatively impacted by canceled flights similar to the amount of capacity that was not flown, as well as additional expenses from re-accommodating passengers on other carriers. Along with Delta, United, and Frontier, Alaska Airlines with a relatively un-levered balance sheet and low cost growth from Minneapolis-based Sun Country Airlines are favored.

Overall, the airline sector still sees long-term value, even given the recent outperformance in airline equities. Profit guidance provided during second-quarter results is expected to trend toward the higher end of prior ranges due to the favorable backdrop. Figure 6 and 7 show current airline forward P/E and EV based valuation multiples relative to historical ranges.