Airline stocks have been among the big winners so far in 2021, but Friday was not a good day for the sector.
Shares of American Airlines Group (AAL 5.16%), Delta Air Lines (DAL 3.43%), United Airlines Holdings (UAL 5.08%), Southwest Airlines (LUV 1.78%), Spirit Airlines (SAVE 3.22%), and JetBlue Airways (JBLU 2.17%) all fell by about 10% in early trading before recovering somewhat as the day went on.
It was about a year ago this week when airlines first began to sound the alarm about the coronavirus, though at the time there was still some reason to hope it would be a regional issue that would only impact certain international flights. That proved not to be the case, of course, and the airlines in the months that followed saw a significant portion of their equity wiped out as travel demand bottomed out.
We've come a long way since, and for much of 2021 the airlines have rallied as part of the so-called "reopening trade." The rollout of vaccines should help the economy to reopen in the months to come, and investors have been buying into airlines believing there is a lot of pent-up demand for vacation travel this summer.
On Friday that rally took a breather. There's an argument to be made the stocks have soared too high too fast, given the substantial damage done to balance sheets during the pandemic and the likely delayed recovery of international and business travel. Investors in recent days seem to be focusing as much on the risk as the potential, which is putting pressure on the entire sector.
The airlines are safe from default, but the valuations are stretched. We're past the point where the sector should trade in unison based on survival potential, and it's time to pick winners and losers.
Spirit has been a popular choice because its low costs and focus on leisure travel should make it one of the first to recover assuming it is price-sensitive vacationers who return to the airports first.
Delta and Southwest, meanwhile, have among the best balance sheets in the industry and should be able to withstand whatever added turbulence comes their way. These were two of the top airline stocks to own prior to the pandemic, and as things normalize they should be able to return to their pre-lockdown success.
I'd advise more caution on the other three carriers. American came into the crisis with added debts and was less far along in transforming the business than United or Delta, and will likely need longer than most to fully recover. United has a network that has been the envy of the industry for years due to its focus on business and international travel, and has some work to do to capitalize on the near-term expected demand.
JetBlue is a bit of a wildcard. The airline has a great brand and a lot of leisure-focused destinations, but it also is in the middle of a transition including ramping up an alliance with American. In recent years, JetBlue has tended to do best when travelers are less price-sensitive and more are willing to pay up for its well-regarded Mint premium product.
The airlines are once again safe investments, something that seemed unlikely just a year ago. But given how much the stocks are up this year it would be wise for investors to exercise a good amount of caution if buying in right now.