What happened
A number of airline executives are making the rounds at an investment conference this week, and their tone is optimistic. That, coupled with a new milestone in the return of air traffic following the pandemic, has airline stocks gaining altitude on Tuesday.
Shares of United Airlines Holdings (UAL +1.93%) and American Airlines Group (AAL +2.14%) were each up more than 5%, while Delta Air Lines (DAL +5.21%) and JetBlue Airways (JBLU +7.28%) were up more than 4%. The enthusiasm even extended to Brazil-based, but New York-traded, Azul (AZUL +0.00%), which was up as much as 5.9% as of this writing.
So what
Airline stocks endured a miserable 2020 as the pandemic quelched demand for air travel, but the sector has mostly been on the rise since the initial vaccine rollout. Passengers have indeed been returning. On Sunday, the number of U.S. air passengers flying topped 90% of the 2019 figure for the same day, the first time we've hit that mark since the pandemic began.
Image source: Getty Images.
Speaking at a conference organized by Wolfe Research, airline execs sounded optimistic that the rebound is sustainable. Delta president Glen Hauenstein said the recovery has progressed faster than the airline had expected, while United management said the airline was closing in on profitability.
American perhaps provided the commentary investors most want to hear, with CFO Derek Kerr saying that business travel and international, two segments expected to lag leisure for the time being, are showing "encouraging signs." Those business lines tend to be the most lucrative part of the operation for large carriers like American, Delta, and United, and a quicker-than-expected recovery would help the airlines return to profitability faster.
There was no company-specific news on Azul, and in fact, the COVID-19 pandemic in its native Brazil is still raging. But Azul is among the healthiest airlines in Latin America, and the company has reportedly engaged with advisors to explore ways to take drive consolidation in the region.
In a statement, Azul CEO John Rodgerson said the airline "is emerging from this crisis in a leadership position in terms of liquidity, network recovery and competitive advantages."
Now what
The airlines have indeed come a long way since the start of the pandemic, but the question for investors should be whether a lot of that progress is already priced in. On an enterprise value basis, factoring in both market capitalization and debt, American and United are valued today at a premium to where they were prior to the pandemic.
Given that pandemic-related risks still remain, and factoring in the recovery we've already seen, it is hard to predict that airline stock prices will continue to soar in the months to come. For long-term investors able to look past any turbulence on the immediate horizon, Delta is a well-run company with a relatively affordable stock. Just be sure to exercise caution, even if it does appear the pandemic has receded in some countries.
