The steep oil price increase (up 33% in first-quarter 2022) does not bode well for the Zacks Airline industry players as far as their bottom-line growth is concerned. This is because fuel expenses form a chunk of the input costs borne by the aviation space.

That the oil price will be high at least in the near term can be gauged from the forecast given by the U.S. Energy Information Administration (EIA).  Per EIA, the average Brent crude oil spot price will be $107 a barrel in second-quarter 2022 and $103 in the second half of 2022. Akin to the first quarter, high fuel costs are likely to dent the airlines’ bottom-line growth in the June quarter. The spike in a major input cost is likely to shoot up the airfares, thus making air-travel costlier.

Despite the exorbitant air fares, stocks in the industry have gained 17% over the past three months.

Image Source: Zacks Investment Research

Let’s delve deep to unearth the reasons for the upbeat stock price performance despite the sharp rally in the bulk input cost for the industry participants.

The sole reason behind this upward stock movement is the buoyancy in demand for air-travel. That the fuel cost-induced hike in air-ticket price is not dampening demand can be figured out from the assertion of United Airlines’(UAL Quick QuoteUAL - Free Report) CEO Scott Kirby. Per Kirby, there is "not a hint of evidence" that the rising ticket prices are hurting consumer demand.

In response to the bullish demand scenario as highlighted by the healthy trend witnessed with respect to air-travel (mainly for leisure) bookings, the UAL management raised its current-quarter outlook for unit revenues. In an SEC filing dated May 16, UAL’s management projected total revenue per available seat miles (TRASM: a measure of unit revenue) for second-quarter 2022 to increase in the 23-25% band from the second-quarter 2019 actuals. Per the previous TRASM forecast, given last month while releasing first-quarter 2022 results, the metric was expected to improve roughly 17% from the second-quarter 2019 actuals.

United Airlines apart, other U.S. carriers, including the likes of Delta Air Lines (DAL Quick QuoteDAL - Free Report) , Southwest Airlines (LUV Quick QuoteLUV - Free Report) , American Airlines (AAL Quick QuoteAAL - Free Report) and Alaska Air Group (ALK Quick QuoteALK - Free Report) lifted their respective second-quarter views for revenues.

Delta expects June quarter's adjusted total revenues to be fully restored to the 2019 level. Previously, the airline had expected the same to have recovered 93-97% from the 2019 level. DAL anticipates total unit revenues to rise seven to eight points from its initial expectations.

Operating margin is predicted to be 13-14% compared with the previous guidance of 12-14%. Fuel price per gallon is now estimated to be $3.60-$3.70 in the second quarter, higher than the previous guidance of $3.20-$3.35.

Driven by the continued strength witnessed with respect to passenger yield, Southwest Airlines’ management expects second-quarter 2022 operating revenues to increase in the 12-15% band from the earlier estimate of an 8-12% rise. Economic fuel costs per gallon are now forecast in the $3.30-$3.40 range (earlier forecast was in the $3.05-$3.15 band). Management at LUV, which currently sports a Zacks Rank #1 (Strong Buy), said that the yield strength, driven by upbeat demand, more than offset the fuel price increase. You can see the complete list of today’s Zacks #1 Rank stocks here.

Alaska Air currently expects total revenues to increase 12-14% from the second-quarter 2019 actuals. Earlier expectation was for a 5-8% increase. Driven by upbeat demand, load factor (% of seats filled with passengers) is anticipated in the 87-88% range (earlier expectation was in the 85-88% band). Due to high oil price, the current-quarter economic fuel cost per gallon forecast is raised to the $3.65-$3.68 range from the $3.25-$3.30 band expected earlier. However, like LUV, ALK’s management is of the view that the revenue strength is offsetting increases in oil prices.

American Airlines also increased its second-quarter revenue guidance owing to upbeat air-travel demand. AAL expects total revenues to rise between 11% and 13% from the second-quarter 2019 actuals (earlier expectation was an increase in the 6- 8% range).

TRASM is now anticipated to be 20-22% higher than the second-quarter 2019 reading (earlier estimate was a 14-16% rise). Driven by upbeat demand, the pre-tax margin, excluding net special items, is anticipated in the 4-6% range compared with the 3-5% band expected earlier. Due to high oil price, the current-quarter average fuel cost per gallon forecast is raised to the $3.92-$3.97 range from the $3.59-$3.64 band expected earlier.

The upbeat demand scenario is aiding not only the U.S. carriers. In May, the European carrier Ryanair Holdings (RYAAY Quick QuoteRYAAY - Free Report) stated that load factor is expected to reach the pre-pandemic levels at 94-95% in the months of June-August. The rosy forecast comes on the back of healthy bookings for summer travel.

Per CEO Michael O'Leary, "Bookings over the last number of weeks have continued to strengthen – both the numbers are strengthening and average fares being paid through the summer are rising." O'Leary added that bookings are especially strong to the beaches of Portugal, Spain, Italy and Greece.

Wrapping Up

This optimistic air-travel demand scenario, driven by wide-spread vaccination against COVID-19 and the easing of travel restrictions, is a huge positive for the airlines. As highlighted by the sunny top-line forecasts, passenger revenues, accounting for bulk of an airline’s top line, are likely to be strong in the second quarter of 2022. In fact, we expect this favorable top-line scenario to aid the aviation space throughout the ongoing year.