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Why Airline Stocks Are Up Today

By Lou Whiteman - Updated Feb 24, 2021 at 2:49PM

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Are airline stocks at risk of overheating?

What happened

It's another good day for airlines, with their stocks again gaining altitude as part of the so-called "reopening trade" as investors flock to companies that figure to benefit as the pandemic subsides. Shares of United Airlines Holdings (UAL 2.88%) were up as much as 10% on Wednesday, while shares of American Airlines Group (AAL 3.55%) and Southwest Airlines (LUV 1.69%) both traded up more than 5%.

So what

The airline industry, after a miserable 2020, is staging a comeback. The pandemic wiped away travel demand and sent airlines into the red, but as vaccine rollouts continue, there is growing optimism that we will see pent-up demand for at least leisure travel by this summer.

That optimism has airline stocks up off the mat. Some airlines lost more than half of their value in the early days of the pandemic, but a combination of government assistance and relatively healthy balance sheets coming into the crisis allowed the U.S. industry to avoid major bankruptcies and steadily progress higher in the months that followed.

A plane flies over clouds.

Image source: Getty Images.

American and United were seen as among the most vulnerable heading into the pandemic, in part because of their reliance on business and international travel. Those tickets are likely to take longer than leisure to return. Southwest, meanwhile, has a history of going on the offensive when other airlines are struggling. And there are early indications the airline has already returned to those ways in this cycle.

The week started with shares rising on a sectorwide upgrade by one Wall Street bank, and the airlines have showed few signs of losing altitude in the days that have followed.

Now what

It would have been crazy to suggest this six months ago, when the future of the industry was still very much in doubt, but I'm beginning to wonder if airline stocks have come too far too fast.

Most of the stocks aren't quite back to pre-pandemic levels, but looking at these companies based on enterprise value (a measure of total market capitalization plus debt), some are actually up from the beginning of 2020.

AAL Chart

Airline data by YCharts.

It's one thing to say airlines are safe to buy, but quite another to suggest that the sector is better off, or at least deserving of higher multiples, after having gone through the pandemic.

One could argue that the airlines' ability to survive the pandemic without bankruptcies shows the former boom/bust industry is now consolidated enough to not resort to bankruptcy every time the market goes south, and therefore deserves higher valuations from here. Or it is possible that investors now assume that, since the government helped out last year to preserve employment, the industry is likely to receive help next time around as well.

We'll see.

I was bullish on airline stocks in the early days of the pandemic, even when others were selling. I still believe stocks like Southwest are good buy-and-hold candidates for long-term investors. But given how far we have come, and the risks that remain as we continue to fight the pandemic, I'd advise caution if considering buying into most airlines right now.

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Stocks Mentioned

Southwest Airlines Co. Stock Quote
Southwest Airlines Co.
$36.73 (1.69%) $0.61
United Airlines Holdings, Inc. Stock Quote
United Airlines Holdings, Inc.
$36.44 (2.88%) $1.02
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
$13.13 (3.55%) $0.45

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

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