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Why Airline Stocks Like Delta and United Were Grounded (Again) Today

By James Brumley – Dec 1, 2021 at 5:14PM

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Just when it looks like the industry is nearing cruising altitude, it runs back into some all-too-familiar turbulence.

What happened

After starting the day with a gain, shares of Delta Air Lines (DAL -3.31%), American Airlines Group (AAL -3.83%), and United Airlines Holdings (UAL -3.25%) all ended Wednesday's trading session firmly in the red. The first confirmed case of the omicron variant of COVID-19 in the U.S. prompted worry that new lockdowns and travel bans could be in the offing.

So what

While it's possible the coronavirus variant first identified as omicron in South Africa a week ago and detected in more than 20 countries in the meantime was already here, the variant's arrival in the U.S. is now confirmed. One individual in San Francisco has tested positive for the variant. The infected person returned from a trip to South Africa on Nov. 22, potentially exposing others to infection between then and Wednesday.

Given the timing of the individual's travel, it's arguable others in the U.S. have been and/or are infected without realizing it. And that's a problem. The existing vaccines and some treatments were developed based on pre-delta variants of the coronavirus, and may be somewhat ineffective against the newest mutation of the virus. Notably, the infected individual in San Francisco had been fully vaccinated.

Passenger jets stuck on an airport tarmac.

Image source: Getty Images.

The headlines are of course alarming to shareholders of already-beleaguered airlines. The White House has already imposed restrictions on travelers from South Africa and several neighboring countries into the U.S. Such restrictions could be expanded or even established domestically, should the pandemic's current contraction reverse course again. And even if air travel is not outright banned everywhere, consumers and corporations may choose not to travel until it's clear the threat of the omicron variant is contained, or at least confirmed not to be a serious threat.

Now what

It's already been a rough year for airline stocks. With today's 7.6% setback, United Airlines shares are now down 38% from their March peak, as the hoped-for travel rebound rooted in the widespread availability of COVID-19 vaccines has been weaker than anticipated. Delta stock is off 35% from this year's high thanks to Wednesday's 7.4% loss, and like United, hit new 52-week lows as a result. Ditto for American Airlines, which fell 8% today and now sits 37% below its June high. Much of those losses have been logged just within the past week, as omicron emerged.

DAL Chart

DAL data by YCharts

The scope of these sell-offs is tempting to bargain-minded investors. And sooner or later the industry will push through the headwinds of such alarming news. Cowen research analyst Helane Becker even suggested in an interview with Yahoo! Finance that "we're crying wolf" when such headlines prompt investors to dump airline stocks, only to pick them up again once that panic subsides.

The challenge, however, is the sheer unpredictable volatility these stocks have dished out over the course of the past several months. The fear of new travel bans may well be unmerited, but it's fear that can still take a large toll on these stocks before the market begins to believe that. And of course, maybe worries of new travel bans or even just travel slowdowns are completely justified. As tempting as airline names like Delta and American may be after today's sizable dips, there's simply not enough clarity about their futures to justify the risk of stepping into them now.

Fortunately, that's not nearly as true for other industries and their stocks even with new worries surrounding the omicron variant.

James Brumley has no position in any of the stocks mentioned. The Motley Fool recommends Delta Air Lines. The Motley Fool has a disclosure policy.

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