Days after taking the hard decision to extend flight cancellations into the busy travel season, in connection with the grounding of Boeing 737 MAX, American Airlines (NASDAQ: AAL) received a pat from Wall Street analysts for successfully leading two domestic fare hikes.
The company’s stock traded sharply higher Thursday morning after JP Morgan in a research note appreciated the $5-fare hike that came just a month after a similar increase. What makes it significant is that competitors like Southwest Airlines (LUV) and Hawaiian Airlines followed suit within hours of the fare revision.
The latest stock rally has catalyzed the recovery from the multi-year lows seen at the beginning of the month. It is likely to attract more investors to airline stocks, which witness high volatility amid flight cancellations and demand concerns. American Airlines has effectively handled the price hike, for it is a tricky move to which rivals could have responded either by matching the rates or by using it for competitive advantage.
The latest stock rally has catalyzed the recovery from the multi-year lows seen at the beginning of the month
Moreover, it comes at a time when market sentiment is down over concerns of economic slowdown and further escalation of the US-China trade war, resulting in a slump in international business travel. If demand remains stable, the fare hike will translate into higher revenues in the second quarter, elevating the companies’ prospects as investment options with good returns.
Emulating American Airlines, Southwest earlier this week extended flight cancellations up to September 2. During that period, the company will keep its fleet of Boeing 737 MAX flights grounded. While uncertainty continues to loom over the resumption of 737 MAX flight services across the globe, experts believe aviation companies would maintain the status quo for the time being.
The 737 MAX jets were withdrawn from operation across the world after the deadly crash in March this year, involving an Ethiopian Airlines flight. Meanwhile, the Federal Aviation Administration has hinted at resuming operations by year-end.
Though American Airlines pared a part of the loss it suffered towards the end of last year, the recovery was not sustained. After much volatility, the shares slipped to a five-year low early this month. At just above $33, the stock is close to the levels seen at the beginning of the year. Since last year, it has fallen 23%.
Among others in the aviation space, shares of Southwest moved up 3% in early trading Thursday, while JetBlue (JBLU) made modest gains. United Continental (UAL) and Delta Air Lines (DAL) were up 3% and 2%, respectively.