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Why Airline Stocks Are Tumbling Today

By Lou Whiteman – Nov 26, 2021 at 11:35AM

Key Points

  • Airlines were hit hard by the pandemic, but have slowly recovered as vaccines have allowed for travel to resume.
  • A newly discovered COVID-19 variant threatens to halt that progress, and in a worst-case scenario could require governments to reimpose travel restrictions.
  • The U.S. carriers should be financially strong enough to weather another crisis, but bargain-hunters should not expect a quick turnaround for the travel industry.

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A new COVID-19 variant has travel investors worried that the world will face another wave of lockdowns.

What happened

A new COVID-19 variant discovered in South Africa has markets rattled, and airline stocks are selling off more than most. Shares of Delta Air Lines (DAL 2.52%), Southwest Airlines (LUV 1.72%), American Airlines Holdings (AAL 1.06%), United Airlines Holdings (UAL 1.79%), JetBlue Airways (JBLU 1.34%), Hawaiian Holdings (HA 5.29%), and Spirit Airlines (SAVE 0.38%) all traded down by as much as 10% in Friday's abbreviated market session.

So what

Airline stocks endured a miserable 2020 as the pandemic brought global air travel to a virtual halt. There's been a gradual recovery in 2021 thanks to the arrival of effective COVID-19 vaccines, but the airlines remain in a perilous state. The industry is still struggling to regain profitability, and most carriers are now saddled with significant amounts of new debt that they took on to carry them through the worst of the slowdown.

An airplane prepares for takeoff at an airport.

Image source: Getty Images.

The last thing those companies need right now is a return to the days of pandemic-necessitated lockdowns and travel restrictions. But this new COVID-19 variant threatens just that. On Thursday, South Africa's health minister announced the discovery of a new variant that seems to be spreading rapidly.

During a briefing on the variant, scientists said it has an unusually high number of mutations, raising fears that current vaccines might be less effective against it. If so, governments worldwide might need to reimpose restrictions similar to those they instituted in the spring of 2020.

Even if such an intense response is found not to be necessary, fears about the new variant are likely to crimp demand for travel, potentially delaying the airline industry's recovery.

Now what

It is important to note that at this point, the experts are just beginning to research this variant, and much about it remains to be discovered. It could be as bad as they fear, or the current COVID-19 vaccines could prove to be largely effective at preventing infections and serious cases. But regardless of whether the available vaccines work on this variant, we've come a long way in our ability to treat and prevent COVID-19, and progress continues on medicines designed to make the virus less lethal.

Panic selling based on headlines is hardly ever a good idea, but this new variant is certainly a risk to the airline recovery. If nothing else, it could push many carriers' return to profitability into 2023 or beyond. The airlines have shown themselves to be more resilient than investors feared, and bankruptcies among U.S. carriers still seem unlikely, even in light of this new risk.

For those who have strong enough stomachs to ride out this period of turbulence, Delta and Southwest are the best choices among airline stocks to recover ahead of the pack and thrive when travel demand eventually recovers. But anyone going Black Friday bargain-hunting on Wall Street should be aware that the airline industry's recovery could be a multiyear process, and even the best names will continue to face sell-offs until we get some more positive news about which direction the pandemic is going.

Lou Whiteman owns shares of Delta Air Lines and Spirit Airlines. The Motley Fool owns shares of and recommends Spirit Airlines. The Motley Fool recommends Delta Air Lines, Hawaiian Holdings, JetBlue Airways, and Southwest Airlines. The Motley Fool has a disclosure policy.

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