Please ensure Javascript is enabled for purposes of website accessibility

Why Airline Shares Are Flying High Today

By Lou Whiteman - Dec 6, 2021 at 2:26PM

Key Points

  • Airlines have seen their businesses ravaged by the pandemic, and the threat posed by a new variant weighed on stocks last week.
  • Some encouraging words from a leading government scientist about the severity of the variant is helping fuel gains today.
  • Investors should be aware there is still a lot of risk in owning the airlines, and even in the best-case scenario a recovery will take time.

Motley Fool Issues Rare “All In” Buy Alert

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Dr. Fauci says the initial data on omicron is encouraging.

What happened

Over the weekend, a top U.S. health official delivered some encouraging news about the pandemic. That's providing a lift to airline stocks, one of the sectors most impacted by COVID-19. American Airlines Group (AAL 7.67%) is leading the way higher on Monday, up more than 10% as of 1 p.m. ET, with shares of Delta Air Lines (DAL 6.68%), United Airlines Holdings (UAL 7.88%), Southwest Airlines (LUV 4.47%), JetBlue Airways (JBLU 8.15%), Spirit Airlines (SAVE 7.11%), and Brazil's Azul (AZUL 6.62%) each up 5% or more.

So what

Airline stocks lost more than half of their value in the early days of the pandemic as the industry quickly switched into crisis mode. The companies listed above were able to survive, but took on billions in added debt to make up for lost revenue and have balance sheets that are battered and bruised and in poor shape to deal with any additional crisis.

View out of the window from an airport lounge.

Image source: Getty Images.

With that in mind, it is no surprise that the airlines sold off last week as part of wider concerns about the new omicron variant. But Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases and one of the key U.S. government point persons on the pandemic, told CNN over the weekend that there are some encouraging data indicating the latest variant is not as severe as past iterations.

"Thus far it does not look like there's a great degree of severity to it, but we've really got to be careful before we make any determinations that it is less severe or really doesn't really cause any severe illness," Fauci said.

Fauci's comments helped spark a 2% rally on Wall Street on Monday, and airlines are rallying well ahead of market averages. The airlines are healthy enough to survive all but a nightmare scenario where we return to early COVID-related lockdowns and travel restrictions, and Fauci's comments are an indication that, at least at this point, we do not appear to be heading in that direction.

American is getting an added boost after the stock was upgraded to an in-line rating from underperform at Evercore ISI. Analyst Duane Pfennigwerth wrote that the shares were down about 15% since Thanksgiving, giving American a more reasonable valuation. The analyst noted that American still has a heavier debt load than its peers, but thinks it will be able to strengthen its balance sheet in the years ahead through lower capital expenditures.

Azul's Brazilian domestic market has been slower to recover than the U.S., but the airline is among the healthiest in Latin America and is well positioned to expand. 

Now what

Investors would be wise to pay attention to the second half of Fauci's comments, where he notes that we still need to be careful about rushing to any conclusions. As we've learned over the past 18 months pandemics by their nature are unpredictable, and even if omicron doesn't end up as bad as some have feared we could still face further twists and turns before COVID is behind us.

For those who have a long enough time horizon, there is a lot to like about long-term travel trends. An emerging global middle class, coupled with pent-up demand for travel in the U.S. and elsewhere and an eventual return of business travel, should help push airlines higher in the years to come. But it appears likely that rise will take time, and will face further turbulence along the way.

Investors willing to wait out a travel return might want to consider an aircraft leasing company like AerCap Holdings that has broad exposure to aviation instead of trying to pick and choose among individual carriers. If your preference is an airline, Delta, Southwest, and United all look like better bets to bounce back sooner compared to American, which as Pfennigwerth notes has more work to do to repair its balance sheets.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Southwest Airlines Co. Stock Quote
Southwest Airlines Co.
$45.11 (4.47%) $1.93
JetBlue Airways Corporation Stock Quote
JetBlue Airways Corporation
$10.22 (8.15%) $0.77
United Airlines Holdings, Inc. Stock Quote
United Airlines Holdings, Inc.
$46.97 (7.88%) $3.43
Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
$40.72 (6.68%) $2.55
Spirit Airlines, Inc. Stock Quote
Spirit Airlines, Inc.
$20.64 (7.11%) $1.37
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
$17.82 (7.67%) $1.27
Azul S.A. Stock Quote
Azul S.A.
$13.52 (6.62%) $0.84

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/17/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.