What happened
Airline shares are rallying for the second straight day on Tuesday, as investors continue to see reasons to hope travel patterns disrupted by the coronavirus pandemic will soon begin to normalize. On Monday, it was an increase in airport traffic over the weekend that drove shares higher. Today, it is positive headlines on a vaccine.
Shares of American Airlines Group (AAL +1.29%) and Southwest Airlines (LUV 0.19%) each topped out at more than 7% on Tuesday morning, with shares of United Airlines Holdings (UAL 0.12%), Delta Air Lines (DAL +0.30%), JetBlue Airways (JBLU 0.39%), Alaska Air Group (ALK +0.62%), Spirit Airlines (SAVE +0.00%), Hawaiian Holdings (HA +0.00%), and Allegiant Travel (ALGT +1.03%) all spiking 5% or more.
International airlines trading in the U.S., including Brazil's Azul (AZUL +0.00%), also joined in the rally.
The stocks gave back some of those gains as the morning went on, but the entire sector was solidly in the green as of 11:30 a.m. EST today.
So what
Airline stocks have been beaten down by the pandemic, with investors aggressively selling the sector back in the spring as it became apparent travel demand was plunging and would not quickly return. In the months since, the stocks have largely traded based on broader market sentiment about how long the pandemic will linger, and what the economy will look like when it is gone.
Image source: Getty Images.
Stocks got a boost on Tuesday after Russia became the first country to grant regulatory approval to a coronavirus vaccine, developed by Moscow's Gamaleya Institute. It still needs to complete final trials, but Russian President Vladimir Putin expressed confidence it would be in production before year's end.
That would be great news for the airlines, as travel is unlikely to fully rebound without a vaccine, which is also likely needed before large corporations let workers fly for business reasons, a major revenue generator for airlines.
Now what
There's reason for skepticism about the news out of Russia, which might explain why the stocks gave back some of those early gains. The vaccine was approved prior to a large-scale phase 3 trial, and the announcement appears designed as much to stir nationalistic pride as it is to declare a resolution to the coronavirus threat.
The Russians will market the vaccine internationally under the name Sputnik V, according to Reuters, a reference to the Soviet Union's 1957 milestone achievement when it launched the world's first satellite into space.
Even if the vaccine is a success, there are several other vaccine candidates nearing phase 3 trials, meaning it is unclear the Russia announcement really pushes the timetable forward substantially.
Progress toward a vaccine is definitely good news, and I don't want to downplay it. But investors need to understand there will be no quick solution to what ails this industry. We are still looking at 2022 before there is any chance of a full recovery. And even when traffic returns, the airlines will have to manage through billions in added debt taken on to survive the downturn.
For investors looking to buy in, it is best to focus on top names with the best chance of surviving whatever comes at the airline industry next.
