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 (NASDAQ:AAL) is leading the way higher on Monday, up more than 10% as of 1 p.m. ET, with shares of Delta Air Lines (NYSE:DAL), United Airlines Holdings (NASDAQ:UAL), Southwest Airlines (NYSE:LUV), JetBlue Airways (NASDAQ:JBLU), Spirit Airlines (NYSE:SAVE), and Brazil's Azul (NYSE:AZUL) each up 5% or more.
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.
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.
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.