The 737 MAX grounding broke a streak of strong performance by Boeing (BA -1.32%) last year. The COVID-19 pandemic has added to Boeing's woes by undermining aircraft demand.

However, Boeing stock has rallied strongly in recent weeks, thanks to promising news about several vaccine candidates and the FAA's recertification of the 737 MAX. Bulls appear confident that earnings and cash flow will recover within a few years, helped by Boeing's position as half of an aircraft manufacturing duopoly (alongside Airbus).

BA Chart

Boeing stock performance, data by YCharts.

Yet the lifting of the 737 MAX grounding and end of the pandemic won't fix all of Boeing's problems. Investors looking to bet on a recovery in air travel demand would be better off investing in high-quality airline stocks like Delta Air Lines (DAL -0.20%) and JetBlue Airways (JBLU -2.16%).

Boeing depends on growth

Investors who have bid up Boeing stock this month may believe that as long as air travel demand returns to 2019 levels within a few years, Boeing's revenue, earnings, and cash flow will recover. That's not necessarily true, though. Unless airlines are actually growing -- not just returning to their pre-pandemic fleet sizes -- aircraft demand will remain far below 2018-2019 levels.

Indeed, Boeing and Airbus built far fewer aircraft annually in the 1990s than they have lately. Mathematically, that means the replacement market is modest in size compared to the total number of aircraft deliveries in recent years. Sure enough, between 2015 and 2018, more than two-thirds of all new commercial jets delivered were used for growth.

Boeing is also losing market share to Airbus in the narrow-body market, which now accounts for the vast majority of commercial jet demand. Today, Airbus' narrow-body backlog is nearly twice as large as Boeing's. However, the airline industry's growth -- or lack thereof -- is a bigger concern at present.

A Boeing 737 MAX 9 flying over clouds

Image source: Boeing.

A brief lesson in airline profitability

U.S. airline stocks have performed quite well over the past decade, as industry consolidation led to sustained profits. Before the pandemic hit, shares of Delta and JetBlue were beating the S&P 500 over that period, and JetBlue stock is still up 128% from 10 years ago, while Delta shares have gained 189%.

This airline renaissance hasn't been a global phenomenon, though. Last year, the global airline industry generated about $26 billion of net income, according to the International Air Transport Association (IATA), about 65% of which came from North America. Delta alone earned $4.8 billion: more than 18% of the total global industry's profits. In Europe and the Asia-Pacific region, low-single-digit profit margins were the norm. Meanwhile, the airline industry lost money in Latin America, the Middle East, and Africa last year. Middle Eastern airlines have been collectively unprofitable since 2017, while the African industry has an even longer streak of losses.

In recent years, many airlines around the world have expanded rapidly despite generating little or no profit. Those carriers were already on the rocks before the pandemic hit. The investors and governments that had been propping them up have learned an expensive lesson in 2020. Those airlines will have to earn the right to grow by first retrenching until they turn profitable.

The case for high-quality airline stocks

Last week, the IATA reiterated its forecast that airlines in every region of the world will be collectively unprofitable in 2021. That could lead to more airline failures. At the very least, it will cause most airlines to focus on shrinking and cutting costs rather than growing.

Well-run U.S. airlines should be among the first in the global industry to return to profitability. Analysts expect both Delta Air Lines and JetBlue Airways to get close to breakeven next year, despite their revenue being down 30% to 40% or more relative to 2019. Both airlines are retiring less-efficient planes, cutting overhead costs, and retooling their route networks to offset the impact of lower revenue.

Thanks to their 2020 cost cuts, Delta and JetBlue would probably earn record profits in 2023 if demand were to recover fully by then. They would also generate plenty of free cash flow to pay down debt accumulated this year. And since neither airline issued stock this year to fund losses, shareholders' stakes haven't been diluted much. Nevertheless, both airline stocks trade well below their early 2020 highs.

DAL Chart

Airline stocks 2020 performance, data by YCharts.

Whereas Delta and JetBlue can stage full profit recoveries once demand returns to 2019 levels, Boeing would still be suffering from a lack of industry growth. Many airlines outside the U.S. have been struggling to make money for years, so it could be a long time before the global airline industry returns to its pre-pandemic growth rate. That implies lower demand for commercial jets -- and as noted above, Boeing's market share will be considerably lower than it was two years ago.

In short, Boeing stock probably won't reach new highs until the weakest airlines in the world figure out how to grow profitably. High-quality airline stocks like Delta and JetBlue will be earning record profits long before that happens. That makes them worthier investments.