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Can Airline Stocks Bounce Back in 2021?

By Lou Whiteman - Dec 28, 2020 at 7:30AM

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It's been a difficult year for air carriers. Will 2021 be any better?

It was a turbulent year for airline stocks. The COVID-19 pandemic caused travel demand to plummet and left airlines scrambling to raise cash to survive.

The year is ending with a glimmer of hope. No U.S. publicly traded airline fell into bankruptcy as a result of the pandemic, and with vaccines now slowly beginning to roll out, there is reason to be optimistic we'll see better days ahead.

Is it time for investors to climb on board? Here's a look at what to expect from airline stocks in 2021.

ALGT Chart

Airline data by YCharts.

There's no quick fix

The various vaccines being approved are an important development because it is impossible to make a bull case for airlines without the pandemic ending and the economy getting back to some semblance of normalcy. But there will be no quick recovery for the industry.

For now, passengers continue to stay away. Industry revenue is projected to fall more than 65% year over year, and the airlines are missing out on a lot of revenue during the usually high-margin holiday travel season. The American Automobile Association expects a 29% drop in total travel traffic between Dec. 23 and Jan. 3, with a 60% decline in air travel. That would be consistent with the Thanksgiving period, where air travel demand fell far more than road travel.

A passenger in a mask walks through an airport terminal.

Image source: Getty Images.

Business and international travel, which have historically been more lucrative for airlines, could take until 2024 or later to fully recover. And even as passenger traffic and revenue return, the airlines will have to focus on repairing balance sheets that have been bruised during the crisis.

The industry raised more than $50 billion in equity and debt financing in 2020 to survive the pandemic, and many of the top names issued warrants to the U.S. Treasury in return for funding, and are limited in terms of cash deployment options until the debts are paid back.

Every little bit will help

But even if we don't have a full recovery until 2024, airlines will likely see an uptick in demand as the vaccine becomes more widespread. The bull case for the sector in 2021 would be for the vaccine to be available to the general public by spring, leading to loosening restrictions and a return to normalcy.

There's a lot of pent-up demand for leisure travel, and if vaccinations proceed as planned, I expect passenger volumes to skyrocket next summer. The U.S. Travel Association expects total travel spend by U.S. residents to climb 20% in 2021 to $698 billion. Obviously, not all that spending will be on airfares, but that level of growth would funnel billions in extra revenue to the airline industry.

Investors looking to gauge the speed of a recovery should monitor two periods early in the year:

  • Late January is typically the time families and students begin to book spring break trips. A lot will likely hinge on how much is open to tourists by then, and how quickly the vaccine is being distributed.
  • Late April is when airlines typically get a feel for summer vacation demand.

The airlines in 2020 have been very forthcoming via regulatory filings about fluctuations in demand, both positive and negative. Hopefully, that will continue through a recovery. In the meantime, investors can monitor Transportation Security Administration stats on passenger volumes, and expect summer forecasts to be a major focal point in April during airline first-quarter earnings calls.

An airplane rises above the clouds.

Image source: Getty Images.

It's time to get choosy

For much of 2020, the airlines traded as a group, caught up in macro headwinds like the pandemic and the resulting economic slowdown that made it difficult for any individual company to outperform. As vaccines become more widespread, it's time to pick winners and losers.

Southwest Airlines ( LUV -0.77% ) has the industry's best balance sheet and a nearly 50-year history of capitalizing when other airlines are in trouble. The airline is already going on the offensive and is a safe bet to ride out the storm and come out ahead.

Spirit Airlines ( SAVE -0.17% ), though much smaller than Southwest, has an industry-low cost structure and a business built around the leisure travelers who are expected to return first. I expect Spirit to recover faster than many of its larger rivals, and if so, its stock should be a winner in 2021. Delta Air Lines ( DAL -0.26% ) is trying to differentiate itself by capping passenger counts well into 2021, costing itself near-term revenue in hopes of building a long-term relationship with customers.

On the other side of the spectrum, I'd advise caution with American Airlines Group ( AAL -0.22% ) due to its industry-high debt load, and United Airlines Holdings ( UAL -1.32% ) because its network is optimized for business travel and will need time to adjust to the current environment.

Hawaiian Holdings ( HA -0.50% ) is a well-run company, but it has a niche network that will likely experience a significant increase in competition since Hawaii is one of the few highest-margin domestic tourism destinations. In normal times, Hawaiian is able to counter increased competition via international flights, but that is unlikely to be a viable strategy in 2021.

The airlines have made it through the worst of the crisis, but still face a difficult climb in 2021. It's safe for a patient investor to buy in, but be choosy about what you buy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Southwest Airlines Co. Stock Quote
Southwest Airlines Co.
$45.21 (-0.77%) $0.35
United Airlines Holdings, Inc. Stock Quote
United Airlines Holdings, Inc.
$43.41 (-1.32%) $0.58
Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
$38.04 (-0.26%) $0.10
Spirit Airlines, Inc. Stock Quote
Spirit Airlines, Inc.
$22.76 (-0.17%) $0.04
Hawaiian Holdings, Inc. Stock Quote
Hawaiian Holdings, Inc.
$19.79 (-0.50%) $0.10
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
$17.89 (-0.22%) $0.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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