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Travelers at John F. Kennedy Airport in New York.

Angela Weiss/AFP via Getty Images

The major U.S. airlines have now issued second-quarter earnings with American and Southwest reporting on Thursday morning, following results from United and Delta Air Lines.

The verdict: Profits are inching back across the industry as leisure travel surges, while business and long-haul international show signs of life.

But carriers face new challenges: Jet fuel prices have surged in the last few months, pressuring operating profits. And the fall travel season, typically weak for leisure, will likely have to see big gains in corporate for airlines to hit Wall Street’s targets.

The other major variable: the Delta variant of the coronavirus. Travel momentum that has built for months may slow or stall if the variant prompts delays in border reopenings and a lifting of travel restrictions.

While Europe has been reopening to U.S. citizens, the Biden administration is going slow in lifting restrictions on visitors from Europe and other regions, including China, India, and Brazil. And the U.S. recently issued a “do-not-travel” warning to the U.K., citing a surge in Covid-19 cases.

For now, airlines are largely meeting or beating forecasts, albeit with some hiccups.

American Airlines Group

(ticker: AAL) topped estimates for revenue and earnings in the quarter. The carrier reported $7.5 billion in sales, 2.2% ahead of consensus forecasts, and posted an adjusted loss of $1.69 a share, beating forecasts for a loss of $2.03.

Excluding a bevy of special items—including $1.4 billion of federal payroll support and tax credits—American said it earned a profit of $19 million or 3 cents a share.

American is also getting back to prepandemic capacity, saying that it expects to fly more than 90% of its domestic seat capacity and 80% of international this summer. For the third quarter, typically weaker than the summer, the carrier expects capacity to be down 15% to 20%, largely matching Wall Street estimates.

But American is likely to take longer to return to pretax profits than its legacy rivals United (UAL) and Delta (DAL), notes Raymond James analyst Savanthi Syth. American’s huge debt load is weighing on results. And while the carrier said that it planned to pay down debt quicker than it previously expected, it remains a burden on the balance sheet.

Syth maintained a Market Perform rating on the stock.

Citigroup’s
Stephen Trent
was also skeptical of Americans’ plans to pay down $15 billion in debt over the next four years. The carrier’s “call to reduce financial leverage by $15 billion in four years is welcome,” he wrote, “but is certainly not an easy task.” That figure is larger than American’s total equity value of $13.7 billion, he notes, and the carrier’s debt repayment will give it less flexibility to invest in other areas.

He also maintained a Neutral rating on the stock and $21.50 target.

Southwest Airlines

(LUV), on the other hand, has the strongest balance sheet of the major carriers, along with exposure to the strongest segment of air travel—domestic leisure—two factors that should help it post meaningful profits well ahead of other legacy carriers.

Southwest’s second quarter was a mixed bag. The carrier reported slightly more revenue than forecast at $4 billion, beating consensus estimates by 1.8%. The airline posted earnings before interest, taxes, depreciation, and amortization, or Ebitda, of $228 million, ahead of forecasts for $192 million.

But Southwest missed forecasts for earnings per share, posting a loss of 35 cents, against estimates for a loss of 23 cents. Jet fuel prices weighed on the bottom line, increasing sharply from the first quarter, noted CEO
Gary Kelly
in a release. And the airline is predicting cost increases in the third quarter as it brings back most employees and fuel prices remain elevated.

But Kelly also highlighted positive booking trends, noting that leisure traffic in June rebounded above 2019 levels at comparable fares. Leisure bookings and fares in July are trending higher than July 2019 levels, he added, and while business continues to lag, he said the carrier is seeing “steady weekly improvements” in corporate bookings.

The carrier’s third-quarter outlook was for capacity to be flat compared with 2019 levels. That came in ahead of some forecasts; Cowen’s Helane Becker had expected capacity to be down 11%, for instance.

She maintained a Buy rating and $67 target on the stock, while cautioning that monthly results “warrant monitoring.”

Syth also liked the outlook, noting that “the revenue outlook appears encouraging.” She also maintained an Overweight and $68 target.

Airline stocks aren’t doing great this year, however. The sector is underperforming the S&P 500, gaining 11.5% against a return of 16% for the broader market. And while strong second-quarter results have sparked a mini-rally, the sector is still down 8.5% over the last month versus a 2.6% gain for the S&P 500.

The only carrier beating the market this year also happens to be the one with the most fragile finances: American Airlines. It’s up 36.6% on the year, more than triple the sector’s gains.

Write to Daren Fonda at daren.fonda@barrons.com

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