Wall Street is taking a cautiously optimistic view of the airline sector heading into the second quarter. In a new note, Morgan Stanley analysts said they expect major US carriers such as Delta Air Lines and United Airlines to meet or beat their financial guidance for the period, thanks in large part to a sharp drop in jet fuel prices.
Jet fuel has slipped below $3 a gallon, a level that provides meaningful relief for airlines after a period of elevated costs. Fuel is typically one of the largest operating expenses for carriers, so even modest declines can have an outsized impact on profitability.
Fuel tailwind boosts earnings outlook
For everyday investors, the connection is straightforward: when airlines spend less on fuel, more of their revenue flows to the bottom line. Morgan Stanley's call suggests that Delta, United, and potentially other network carriers are well positioned to deliver results that meet or exceed what they have told Wall Street to expect.
The bank's view aligns with broader trends in energy markets. Crude oil prices have softened in recent months, and that has filtered through to refined products like jet fuel. For airlines that have not fully hedged their fuel exposure, the savings can be substantial.
Delta, in particular, has a unique advantage: it owns a refinery in Pennsylvania, which can help shield it from price swings. That dynamic was highlighted in a recent Delta earnings preview that noted how the refinery edge could protect profits even when fuel costs are volatile.
Pricing power faces a six-month test
While the near-term picture looks bright, Morgan Stanley also sounded a note of caution. The bank warned that airline pricing could face another test in roughly six months. That timeline suggests that the current favorable environment may not last indefinitely.
Airlines have enjoyed relatively strong pricing power in recent quarters, as post-pandemic travel demand has remained robust. But if capacity increases—meaning more flights and seats—or if consumer spending softens, airlines may have to cut fares to fill planes. That would squeeze margins even if fuel costs stay low.
Investors should watch for signs of capacity discipline among carriers. If airlines continue to add flights aggressively, it could erode the pricing environment. Conversely, if they hold back, the current tailwinds could persist longer.
What it means for investors
For those holding airline stocks or considering them, the Morgan Stanley note provides a framework for thinking about the next few months. The second quarter looks relatively safe, with fuel costs providing a buffer against other potential headwinds. But the six-month outlook is less certain.
Investors should also consider the broader context. The airline industry is cyclical and sensitive to economic conditions. A strong economy supports travel demand, while a slowdown can quickly reverse gains. Recent Fed minutes and early earnings reports have shown that markets remain nervous about interest rates, which could eventually weigh on consumer spending and travel.
Morgan Stanley's view does not mean every airline will perform equally. Carriers with strong balance sheets, diversified revenue streams (such as premium cabins and loyalty programs), and efficient operations are better positioned to weather any downturn. Delta and United, both mentioned in the note, are generally seen as industry leaders in these areas.
The bank's analysis also fits into a broader pattern of sector-specific calls from Morgan Stanley. The firm has recently weighed in on other industries, including a short-term boost for Constellation Brands tied to lower gas prices, and a cut to Mosaic's profit forecast in the fertilizer space. Each call reflects how macro factors like energy costs ripple through different sectors.
The bottom line
Morgan Stanley's message for airline investors is one of near-term comfort with a longer-term question mark. Lower jet fuel prices should help Delta, United, and others deliver solid second-quarter results. But the pricing environment six months from now is less clear, and investors should stay alert to changes in capacity and demand.
As always, no single analyst call should drive investment decisions. But the note provides useful context for anyone trying to understand the forces shaping airline profits in 2025.
