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United is going supersonic, but airline stocks fall on mixed guidance and broader worries about troubled sector

United Airlines Holdings Inc. rocked the airline world Thursday with news it would bring back supersonic jets to passenger air travel, but airline stocks traded lower amid mixed guidance for American Airlines Group Inc. and lingering concerns about the industry.

United
UAL,
-2.75%

said earlier Thursday it has agreed to buy 15 supersonic jets from Denver-based aerospace startup Boom Technology Inc., under certain conditions and with the possibility of adding more aircraft, called the Overture.

Related: Summer travel is back, but will it be enough to boost flagging U.S. airlines?

The planes are expected to carry passengers by the end of the decade. The aircraft would travel at twice the speed of today’s fastest airliners, and could connect more than 500 destinations in nearly half the time, the companies said. That would mean, for example, from United’s Newark, New Jersey hub to London in three-and-a-half hours, and San Francisco to Tokyo in just six hours, the companies said.

Passenger supersonic travel came to a halt in 2003 when British Airways and Air France retired the Concorde, amid high costs, concerns about noise, and the air travel slump that occurred after the Sept. 11, 2001 attacks.

United stock dropped nearly 3% by midday trading, with Delta Air Lines Inc.
DAL,
-2.69%

stocks not far behind. Shares of American Airlines
AAL,
-1.72%

fell less than 2%.

The U.S. Global Jets ETF
JETS,
-2.15%

fell 2%, erasing earlier gains for the week and looking to end the shortened holiday week down 0.6%. The ETF has gained 19% this year, and 56% in the last 12 months, compared with gains of 12% and 34% for the S&P 500 index
SPX,
-0.17%

in these same periods.

Both American and Delta unveiled their outlooks for the current quarter, with American saying it still expect its capacity, as measured per total available seat miles, to be down 20% to 25% in the second quarter, and for revenue to be down about 40% compared with the second quarter of 2019, the year before the pandemic decimated travel.

It was mixed guidance, Stephen Trent with Citi said in a note Thursday. The airline mentioned cash flow turning positive in May, positive trends for leisure travel, and some perking up for its business travel. Trent kept his sell rating on American shares.

In contrast to rivals, however, “the carrier made no specific operational cost disclosures, it did not adjust its revenue guide and it is unclear whether cost management and possibly higher fuel prices moved the needle on the previous 2Q’21 pre-tax margin guide that had ranged between -27% and -30%,” Trent said. Its recent share strength “seems disconnected with fundamentals,” he said.

Delta’s second-quarter guidance was “generally positive,” Trent said. Delta earlier Thursday said it expects a pretax profit in the second half of the year, with leisure, business and trans-Atlantic travel driving an incremental demand recovery.

“It is good, but not totally surprising to see premium revenue growth outpacing main cabin, as the latter now has more difficult growth comps,” Trent said in his note. He kept a buy rating on the shares, and highlighted Delta’s “solid work in avoiding shareholder dilution and maintaining a more stable financial situation, relative to some peers.”

Airlines are hoping the return of some summer leisure travel, on the upswing after grinding to a near standstill for most of last year, will go some ways to repair their balance sheets.

But U.S. air carriers have seen their expenses escalate during the pandemic, and are still mostly deprived of some key sources of revenue, including rarely-discounted business and first-class tickets and long-haul flights that make the most of their networks.

Major U.S. airlines received about $50 billion in a series of government bailouts and grants during the pandemic, mostly so they could make payroll, and only paid some of that money back.

Moreover, they still face structural headwinds, with concerns about inflation and rising fuel prices adding to a still-precarious situation.

The surge in leisure demand has driven strong bookings for US airlines, but fuel prices continue to be a headwind, analyst Sheila Kahyaoglu said in a note Thursday.

“The offset to the continued improvement in the macro picture is the continued rise in fuel prices, as spot WTI prices have increased ~15% over the past three months,” she said.

Delta said it expects second-quarter fuel prices to be between $2.10 a gallon and $2.15 a gallon, up 12% from an April guidance of between $1.85 a gallon and $1.95 a gallon.

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