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Why Airline Stocks Are Flying Higher Again Today

By Lou Whiteman – Updated Dec 8, 2021 at 5:11PM

Key Points

  • Investors are more optimistic by the day that the omicron variant will not lead to widespread travel restrictions, helping airlines recover what they lost last week.
  • Southwest Airlines also said it expects to be profitable in the fourth quarter and all of 2022, thanks to strong demand and pricing power.

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Positive commentary on demand and on the omicron variant has the sector taking flight.

What happened

Investors are still trying to figure out what to make of the omicron variant, and what the latest twist in the pandemic will mean for travel stocks. The news Wednesday was mostly positive, and that pushed shares of United Airlines Holdings (UAL -1.24%), Delta Air Lines (DAL -0.80%), American Airlines Group (AAL -1.11%), JetBlue Airways (JBLU -0.50%), and Spirit Airlines (SAVE -0.35%) up as much as 5% apiece.

So what

Airline stocks have come a long way since their spring 2020 lows, but the industry is still feeling the impact of the pandemic. Last year, travel all but shut down, leading the airlines to report massive losses and stretch their balance sheets thin. This has been a year of recovery, but the industry is still vulnerable, and any return to 2020 lockdowns and travel restrictions would create the potential for new headaches.

A tourist wearing a mask walks through an airport.

Image source: Getty Images.

With that in mind, the sector was hit hard when news of the omicron variant first hit last week. But the shares have rallied in recent days following reports that the new variant was manageable, lessening the risk of new global shutdowns.

On Wednesday, Pfizer said that three doses of its vaccine would "neutralize" the variant. The news wasn't all good: Pfizer did say that two doses might not be sufficient protection. But there were enough positives there for investors to gain confidence that lockdowns are not in our future.

The sector is also gaining a boost thanks to an update from Southwest Airlines (LUV 0.08%). The carrier expects to be profitable in the fourth quarter thanks to strong demand and solid pricing power, and said it was aiming to be profitable in all quarters of 2022. Though the comments on profitability were specific to Southwest, it isn't hard for investors to apply that demand commentary to the entire industry.

JetBlue could also be getting a bit of a lift from its announcement that it was expanding its partnership with Aer Lingus. JetBlue has been eager to expand its options for travelers heading overseas, and the ability to sell seats on flights by the Irish carrier from New York and Boston should aid in that effort.

Now what

It is interesting to note that although Southwest was responsible for the most encouraging data point coming out Wednesday, its shares underperformed its airline rivals. Southwest peaked to just a 2.3% gain at 2 p.m. ET on Wednesday, well below United's 7.3% peak gain.

Southwest has a reputation for being the most stable of the U.S. airlines, and its stock didn't fall as much as those other airlines in early 2020 as COVID began to dominate headlines. So there is some logic to the stock not bouncing back as enthusiastically now that conditions are beginning to recover. Investors long assumed that if any airline would survive the pandemic, it would be Southwest, and so positive evidence that it will recover ahead of the pack didn't catch markets off guard.

With that in mind, there is arguably better value for a long-term holder in shares of Delta or United, or even Spirit. Prior to the pandemic, Delta was one of the best-run companies in the industry, and it looks enticing at these levels for investors who are willing to accept near-term turbulence.

United is a turnaround story that is well ahead of American, and it has the industry's best international network that should thrive as restrictions come down. And Spirit has industry-low costs, allowing it to capitalize on price-driven domestic demand.

The airlines accomplished a lot by just surviving 2020 without bankruptcies. Omicron provided a fresh reminder that the pandemic is not over, and the recovery will take time, but for patient investors, there is growing reason to believe the industry will eventually reach its destination.

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

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