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Why Airline Stocks Are Volatile Today

By Lou Whiteman – Dec 20, 2021 at 4:32PM

Key Points

  • Airlines were mostly in the red on Monday because of fears of a new round of lockdowns in Europe, with one of the few exceptions seemingly moved by short covering and not business fundamentals.
  • We don't yet know what will become of the omicron variant, but it seems clear the pandemic will remain with us for some time now.
  • Airlines can thrive post-pandemic, but investors buying in now are likely in for a long wait.

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Investors don't know what to think of the latest COVID headlines.

What happened

The pandemic continues to make headlines, and investors are struggling to figure out what to make of it. On a day when cases surged throughout the United Kingdom and European countries are reinitiating lockdowns, airline stocks were all over the place, with Spirit Airlines (SAVE 0.15%) and Azul (AZUL -1.15%) both falling more than 5% on Monday while American Airlines Group (AAL 1.49%) at one point was up 4.9%.

So what

It has been a long two years for airline stocks. The early days of the pandemic all but wiped out travel demand, leaving much of the global industry scrambling to pay its bills, and even as demand has slowly returned airline balance sheets remain fragile. The last thing the industry needs is a return to the lockdowns and travel restrictions that marked the early stages of the pandemic, but the new omicron variant threatens to do just that.

A woman in a mask walks through an airport.

Image source: Getty Images.

Over the weekend, Israel added the United States to a list of destinations banned because of high pandemic cases, and the Netherlands returned to a lockdown state. Germany and France are weighing new restrictions, and in the United Kingdom new cases are spiking.

So far, U.S. President Joe Biden has resisted calls for new lockdowns, encouraging vaccinations instead. But if we've learned anything over the past two years, it's that the pandemic is tough to predict, and investors sent stocks tumbling on Monday morning on fears things are going to get worse before they get better.

Spirit is a low-cost discounter seen as a good bet to recover first, assuming a resurgence in demand is led by cost-conscious tourists and not business travelers. Azul, meanwhile, is under pressure because its home country of Brazil has been hit particularly hard by the pandemic. Although Azul is one of the healthier carriers in its home region, Latin American airlines are more reliant on international travel than their U.S. counterparts, meaning that new lockdowns could hit it particularly hard.

American is the outlier, though the company traded down more than 2% in premarket hours and began the day in the red. It is possible the stock is up because short sellers, those who bet a stock is headed down, are taking their gains and covering. American as of the end of November was the most shorted airline stock, according to Cowen, with about 15% of its shares sold short. The stock is up on Monday on unusually high volume.

Now what

If nothing else, omicron is a reminder of how little we know about how the coming months will play out. But it does seem clear that vaccines will not quickly get us out of this predicament, and that COVID will remain with us in some form or another well into 2022.

It will be hard for the airline industry to fully recover until the threat of lockdowns and restrictions is behind us. And until that time comes, investors should expect continued volatility and stocks that move higher and lower based on the latest headlines. For those with a long enough time horizon, there is reason to be bullish that travel will eventually return, but little reason to believe that will happen anytime soon.

Of these three stocks, Azul looks like the most intriguing long-term option because of its powerful position in Brazil. But Brazil also could take longer to normalize than the U.S. market, meaning there is still plenty of time to sit on the sidelines. As Monday's trading shows, airline stocks are liable to move around a lot in the months to come without actually going anywhere at all.

Lou Whiteman owns Spirit Airlines. The Motley Fool owns and recommends Spirit Airlines. The Motley Fool has a disclosure policy.

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