Airlines take off on Wall Street; stocks rise more than 9%

Shares of major U.S. airlines rallied Tuesday after upbeat July airfare data indicated an improvement in the sector's pricing power, as airlines are managing their ability to adapt to a weak demand environment.

Shares of legacy carriers United Airlines, American Airlines, and Delta Air Lines closed up between 9 and 12 percent, while their low-cost rival Southwest Airlines gained 5.73 percent.

Smaller companies also posted gains, with Alaska Air up 9.93% and JetBlue Airways up 12.30%.

Low-cost airline Frontier Group rose 29.61% at the close.

Data from the Department of Labor's Bureau of Labor Statistics released Tuesday showed airfares rose 4 percent in July, after falling 0.1 percent in June, marking their first increase in six months.

Signs of improved airfares come after months of pressure on margins due to discounting, as weak demand from budget-conscious domestic travelers forced airlines to cut prices despite the peak summer travel season.

“With the CPI showing a 4% increase in airfares in July, airlines have finally regained pricing power,” said Michael Ashley Schulman, chief investment officer at Running Point Capital.

The uncertainty stemming from US President Donald Trump's tariffs and budget cuts led travelers to reduce their discretionary spending and rethink their plans. Airlines cut the number of available seats and realigned routes to maintain price control and protect their margins.

During second-quarter earnings presentations in July, top executives expressed confidence in the industry's ability to reduce capacity and increase airfares in the second half of the year.

July's airfare increase, the first in six months, reinforced investor hopes that capacity discipline would help airlines stabilize prices and profitability.

“The main risk is that fuel and labor costs will try to rise early, or an unlikely (but possible) recession,” Schulman said.

Spirit, the exception

Spirit Airlines has warned about the company's continued existence, just months after emerging from bankruptcy, as weak domestic demand and dwindling cash reserves impact its operations, causing its stock price to drop 42%.

Adverse market conditions, such as increased domestic capacity and weak leisure travel demand in the second quarter, created a challenging pricing environment for the airline, it stated in its quarterly report released Monday.

The company expects these pressures to persist for the rest of the year, increasing uncertainty. Last month, Spirit announced it would lay off about 270 pilots and demote another 140 to save money.

"Their liquidity provisions require a faster financial recovery than currently expected," said Tim Hynes, director of Global Credit Research at Debtwire.

The Florida-based airline filed for bankruptcy protection last November after years of losses, failed merger attempts, and heavy debt.

It was the first major US airline to file for Chapter 11 bankruptcy protection since 2011. It emerged from bankruptcy in March after a court approved a creditor-backed restructuring.