What happened
On Thursday morning, key players in the U.S. passenger airline industry warned that the Delta variant would put a damper on their third-quarter results. The market apparently was not surprised, and shares of carriers including American Airlines Group (AAL 0.94%), United Airlines Holdings (UAL 5.50%), Delta Air Lines (DAL -0.06%), Spirit Airlines (SAVE -1.95%), and JetBlue Airways (JBLU 4.10%) climbed by as much as 5%.
So what
The airlines were hard hit in 2020 by the pandemic, but have recovered nicely in 2021 as vaccines reduced people's fears about travel and pent-up demand for vacations brought crowds back to airports this summer. We're still a long way from normal, but investors in the so-called "reopening trade" have pushed share prices higher this year.
Image source: Getty Images.
But Delta-variant-driven fourth wave of the pandemic is taking its toll. Before the market opened Thursday, United warned it now expects to post a loss in the third quarter due to a slowdown in customer bookings in recent weeks. The carrier now expects third-quarter revenue to be down by about 33% compared to the same three months of 2019.
American, Southwest Airlines (LUV 0.97%), and JetBlue all issued similar guidance within an hour of United, showing that these are industry-wide issues, as opposed to a specific company having operational troubles. American now forecasts its third-quarter revenue will decline by 24% to 28% from Q3 2019, worse than its previous guidance for a 20% drop, and Southwest expects its operating revenue will be down by 18% to 20% compared to two years ago.
JetBlue anticipates its revenue will be off by 6% to 9%, down from its earlier guidance for a 4% to 9% decline.
So if conditions are worsening, why are the stocks up Thursday?
For one thing, these COVID-19 issues are hardly a surprise. Investors had been anticipating a slowdown in airline ticket sales due to the Delta variant, and relative to expectations, the impact on the entire sector is manageable. The guidance also suggests that the airlines' recovery strategies were working early in the quarter, before the daily new case rate spiked, which is good news for long-term shareholders.
The sector is likely also trading higher on word that the White House will require all federal workers and millions of government contractors to be vaccinated against COVID-19. A vaccinated populous is the fastest and simplest path to ending the pandemic, and the government normalizing vaccine mandates will likely make it easier for other employers to require the shots.
Now what
The investor takeaway from Thursday morning's news seems to be that while things aren't great, they could be worse. And if this recent spike in new cases does recede, there are also signs that airlines have found a way to operate in this environment.
That's great, but investors should be aware there is still a long journey ahead for the passenger air travel sector. For the most part, it was been tourists who fueled 2021's rally, and with summer vacation season over, the segment is likely headed for a lull until the holidays. Many of these airlines won't fully recover until business travelers return, and given that many large employers don't plan to even reopen offices until late this year or 2022, a resumption of robust corporate travel still seems a long way off.
For long-term-minded investors, the best strategy is to buy and hold top operators like Delta and Southwest. Just be prepared for some turbulence on the journey.
