Over the past week, the U. S. airline sector rose against the market. Us global airline ETF (JETS) has risen 3 per cent in the past week, compared with a drop of nearly 3 per cent in the S & P 500 index last week.

From the perspective of individual stocks, this situation is more obvious. UAL.US was among the top gainers, rising 14 per cent last week after Scott Kirby, its chief executive, said the outlook for air travel demand was strong and the company would soon return to profitability. American Airlines (AAL.US) rose more than 6 per cent last week.

However, market participants warn that the airline industry still faces some disadvantages and investors still need to think twice.

Executives' optimistic expectations push airline stocks higher

In fact, it was not the earnings that pushed up airline shares last week, but a steady stream of optimistic forecasts from airline executives.

On April 13, Ed Bastian, CEO of DAL.US (Delta), expressed optimism after reporting good results. "with the growth of our brand preference and demand momentum, we are successfully hedging against the impact of rising fuel prices," he said. "Q2 is expected to achieve an adjusted operating margin of 12 per cent, 14 per cent, and is expected to achieve strong free cash flow." Delta expects total revenue to increase by 93% over the same period in 2019, with a capacity increase of about 84%. After that, analysts and investors began to take a positive view of the aviation industry.

Robert Isom, chief executive of American Airlines, and Scott Kirby of United Airlines made more ambitious forecasts, with the industry as a whole performing significantly better than expected in the face of market turmoil.

"the current demand environment is the strongest in my 30 years," Kirby said on Wednesday. "We are now seeing clear evidence that the second quarter will be a historic turning point for our business."

The latest statistics from the American tourist Association also support executives' predictions of strong demand. The association points out that with the abrupt end of the home trend, about 90% of Americans expect to travel this summer. About half of these travelers want to fly. In addition, 77 per cent of business travelers surveyed by the association said resuming business travel was "more important than ever".

Business travelers' expectations are particularly critical because relatively few business trips account for a higher share of airlines' profits.

Other risks remain.

However, the problem that seems to have been watered down in the optimistic outlook has not actually disappeared. At present, the most prominent problems are inflationary pressures, epidemic restrictions and staff shortages.

"earnings and cash flow are likely to fluctuate sharply given fluctuations in fuel prices, high labour costs and huge capital expenditures," UBS analyst Myles Walton wrote in a recent report outlining industry risks. Although airlines are in better shape than in the past, given overall revenue and cost flows, the situation may soon reverse.

Inflation suppresses demand

The recovery in corporate and international travel is seen as key to overcoming fuel cost resistance. If demand weakens, the prospect of a rapid recovery in the airline industry could turn quickly.

One potential factor contributing to this shift is rising prices, which could significantly dampen travel demand. At present, about 60% of American travelers think that the price of air tickets is too high, and 33% of respondents say that high prices hinder their final travel plans. If fuel prices continue to rise, it will intensify investor doubts about the ability of airlines to pass on costs to consumers.

Similarly, if prices continue to rise and broader economic problems cause people to cut back on spending, companies may be keen to cut back on travel. Many major US banks now believe that the risk of a US recession in 2023 will rise, which could cause companies to shelve large spending plans in the short term. Companies may also make more use of videoconferencing to save costs.

In addition, some industry research groups point out that business travel may not return to pre-epidemic levels until 2024. As a result, airline executives may be overly optimistic about demand.

Epidemic restriction

From the perspective of epidemic restrictions, airline executives may also be too optimistic.

Last week, a federal court judge in Florida ruled that the Public Transport Mask order was null and void, abolishing the requirement to wear masks when taking public transport such as planes, trains, taxis and buses in the United States. the news pushed airline stocks up slightly. But according to White House Press Secretary Jen Psaki, the Biden administration will seek to fight the ruling and may restore the mask order.

However, whether or not to wear a mask is not an important determinant of travel demand. On the contrary, for international travelers, COVID-19 testing requirements are even more important.

At present, Americans entering from abroad need to confirm that novel coronavirus's test result is negative within one day before returning to the United States. Airline executives and lobbyists are opposed to the request, saying these cumbersome requirements have greatly reduced the demand for international travel.

Shortage of personnel

Finally, airlines must solve the problem of shortage of pilots and crew. Although big airlines such as United, Delta and American Airlines say they can successfully solve the staffing problem. But travel cuts across the airline industry, especially low-cost airlines, suggest that many airlines are still struggling with staff shortages.

Scott Kirby, chief executive of United Airlines, said: "the shortage of pilots in the aviation industry is real and most airlines are unable to meet their capacity plans because of a shortage of pilots."

The shortage of staff could also intensify negotiations between airlines and trade unions. ALK.US, for example, is currently at risk of a strike by thousands of pilots, and Delta may soon face a similar dilemma.

For low-cost airlines such as Frontier Group (ULCC.US) and SAVE.US, the labor problem is even worse.

Raymond James analyst Savanthi Syth recently said that negotiations between United and pilots will be crucial to the aviation industry as a whole. The airline industry may face the risk of higher-than-expected salary costs. On the one hand, higher wages for pilots will push up ticket prices, which in turn will reduce travel demand. On the other hand, flight cuts may also hurt airlines' ability to take advantage of consumer demand.

Investment still needs to be cautious.

Of course, airline stocks did not soar for no reason. At present, the share prices of many airlines seem to be very attractive. Airline stocks are likely to continue to rise as more airline executives issue optimistic forecasts.

However, these optimistic forecasts should not be seen as a foregone conclusion, as many problems still hang over the airline industry.

Perhaps most importantly, investors must examine the ability of every airline to cope with shocks, because not all companies can withstand the turmoil.