What happened
On a day when the airlines are focused on the future, investors remain fixated on the challenges facing the sector today. Shares of American Airlines Group (AAL 2.37%), United Airlines Holdings (UAL +0.07%), Delta Air Lines (DAL +1.42%), and Southwest Airlines (LUV +0.36%) all fell as much as 5% on Monday, a weak day for markets overall.
So what
Airline stocks have underperformed since the early days of the pandemic. Travel was all but shut down as COVID-19 spread across the globe, and although demand has somewhat recovered since vaccine rollouts began, we are still looking at years before the industry fully recovers from the crisis.
Image source: Getty Images.
Investors have been watching travel stocks carefully since the first reports of a new variant surfaced. While so far the omicron variant appears unlikely to cause a new wave of travel restrictions, on Monday the World Health Organization cautioned that the variant poses a "very high" risk and data on its severity is still very limited.
The airlines, for what it is worth, are trying to look past the pandemic to when conditions normalize. On Monday, Delta announced it would invest a total of $1.2 billion in international partners Virgin Atlantic, Aeromexico, and Latam Airlines. All three existing Delta partners fell into financial trouble during the pandemic, but Delta relies on its alliances to provide travelers with a full list of international destinations and was eager to keep them loyal.
Delta after the investments will own a 49% stake in Virgin Atlantic, 20% in Aeromexico, and 10% in Latam.
United, meanwhile, announced an investment in hydrogen-electric engine developer ZeroAvia. As part of the deal United has the option to purchase up to 100 zero-emission engines that could be used by United Express regional aircraft before the end of the decade.
Now what
The contrast between the WHO's warnings about the coming months and both Delta's and United's actions to better compete in the second half of the decade is clear. And for investors, it creates an interesting dilemma.
The airlines showed their resilience last year as the pandemic worsened, and all of these companies should have ample resources to ride out the current variant and others that might follow. The industry is not going away, and there is a strong case to be made that post-pandemic pent-up demand, coupled with the rise of the global middle class, will mean strong travel demand in the years to come.
But that demand is not going to materialize overnight, and an extended pandemic means that an investor buying in today to benefit from the recovery is likely in for a long wait. Given the uncertainty, and the expected prolonged wait for a rebound, it will likely be difficult for airline stocks to gain elevation anytime soon.
For those who can tolerate turbulence, Delta's strong balance sheet, less unionized workforce, and top-notch management team makes it an intriguing investment. But it will take time for forward-looking actions like the investment in Virgin Atlantic and the Latin American carriers to pay off.
