Airline sector stocks got a much-needed shot in the arm on Monday when Pfizer and BioNTech announced strong interim efficacy results from the phase 3 trial of their coronavirus vaccine candidate. The COVID-19 pandemic has crippled airlines, and it's hard to make a case for the travel industry recovering until this health crisis is brought under control.
In that sense, it's understandable that investors bid up airline shares after the drugmakers' announcement. But even after that surge, most airline stocks are still way down for the year, and with good reason.
Here's a look at how the latest vaccine news changes the outlook for the airline industry, and whether now is the time to buy into a vaccine-fueled airline rally.
There will be no quick recovery
At best, the approval of an effective coronavirus vaccine will mark the end of the beginning of this crisis for airlines. Infectious disease expert Dr. Anthony Fauci told CNN this week he believes a vaccine could be widely available by next April. But even if it is, the world will be dealing with the pandemic and its aftermath through 2021 and perhaps beyond.
Many large employers have told those employees who can work remotely to stay home through spring 2021, and on-site sales calls have largely been replaced by video meetings. It remains to be seen to what degree those changes in business culture will be permanent, but even if they ultimately prove ephemeral, organizations are unlikely to revert back to their pre-pandemic ways quickly.
Therefore, airlines likely won't see passenger traffic volumes return to their 2019 levels until 2023 or 2024. And the airlines will have a difficult time regaining altitude even as sales start to normalize. The industry has taken on about $50 billion in new debt in 2020; it will take carriers years of nursing their balance sheets back to health before they can start thinking seriously again about allocating capital to growth or returning cash to shareholders.
But airlines will likely see improvements with each step
It's worth noting that the airlines' survival odds go up with every incremental improvement, so this week's hopeful vaccine news does boost the chances that the U.S. segment of the industry will escape this crisis without significant bankruptcy filings.
No carrier is making money now, and some of the bigger ones burned through upwards of $40 million per day in the third quarter. Most of their efforts to stem the bleeding have been focused on the cost side of the equation, since that's the only part they can control.
But obviously, any increase in revenue would also help reduce those losses. And I think human nature could lead to an improving revenue picture even before the vaccine is rolled out.
United Airlines Holdings (NASDAQ:UAL) said recently that more than half of its current customers are booking their travel less than 30 days before departure. That makes sense, given the uncertainty engendered by the pandemic, but that lack of advanced sales also means less cash coming in today.
The psychological impact of Pfizer's announcement is that for the first time since early spring, people can now see a light at the end of the tunnel. I believe that will lead to an uptick in trip planning, and a pull-forward of some much-needed revenue for airlines. Assuming the vaccine progresses as hoped, passenger carriers are likely to see a rebound in bookings well before the vaccine is widely distributed, which would improve their cash position.
Is now time to buy airline stocks?
The best-case scenario for airlines is that Dr. Fauci's timeline is correct and the majority of the U.S. population will have the ability to get vaccinated in time for the summer travel season. Given the life disruptions over the past year, I believe there is significant pent-up demand for vacation and leisure travel. If so, it's possible airlines will be ramping up operations and filling planes by the middle of next year.
That said, it is hard to imagine the more lucrative segments, including international and business travel, will be back to anything close to normal in 2021. If those segments do take longer to revive, even under the bullish scenario, for the next year or two at least, airlines may bring in enough revenue to pay the bills, but not enough to return to pre-pandemic levels of profitability.
And in anything less than the best-case scenario -- for example, if there's an unexpected issue with a vaccine or a post-pandemic recession -- the outcomes would be much worse for airlines.
For those interested in buying in, it would be best to focus on top operators including Southwest Airlines (NYSE:LUV) and Delta Air Lines (NYSE:DAL), which have the highest odds of survival no matter what comes. American Airlines Group (NASDAQ:AAL), with its industry-high debt load, and Hawaiian Holdings (NASDAQ:HA), with a niche network that will likely experience a significant increase in competition since Hawaii is one of the few domestic tourist destinations that skews toward higher-margin flights, are riskier bets.
Given the risks and uncertainty, as well as the long timeline for a recovery, it would be best for investors to limit their airline holdings to occupying only a small part of a well-diversified portfolio. But if aviation does eventually return, some of these airline stocks will look in retrospect like bargains at today's prices. And based on the vaccine news this week, the best-case scenario is on track to become reality.