Shares of Delta Air Lines (DAL 1.02%) traded down by as much as 6% on Monday after the U.S. carrier suspended its codeshare agreement with Russian national airline Aeroflot. The commercial air travel industry is again facing unexpected turbulence, and only those investors with long time horizons should consider buying Delta shares now.
Airlines were hit hard by the pandemic, which starved the industry of revenue, but bounced back nicely early in 2021 as effective vaccines became more widely available and travel demand rebounded. But most of that demand was for domestic leisure travel, not the more lucrative international and business travel that airlines like Delta tend to favor.
Image source: Delta Air Lines.
The rally faded long before Russia invaded Ukraine, and Delta shares lost 10% in the second half of 2021. But war has only further clouded the outlook for the sector, adding rising fuel costs and new uncertainty about international travel to the list of concerns airline investors must consider.
For those looking to buy a U.S. airline stock, there are few better choices than Delta. The company is well managed, and had gained a reputation prior to the pandemic as an innovator in terms of pricing that helped usher in a wave of reform that allowed the legacy airlines to better compete against Southwest Airlines and other discount carriers. It is also less unionized than most of its competitors, giving it more flexibility, and has potential upside from a series of international airline investments.
And the long-term trends favor growth. The U.S. population is more mobile than ever before, and a rising global middle class should create strong worldwide travel demand for decades to come. The International Air Transport Association, an airline trade group, forecasts that global travel volume will grow at a compound annual rate of 3.3% through 2040.
But there is unlikely to be any quick turnaround. The pandemic is still not over, as investors were painfully reminded late last year when the omicron-variant surge took a toll on near-term travel demand. And the war in Ukraine seems likely to dash any hopes that conditions for the industry will normalize before 2023.
There is enough potential upside here to convince long-term holders to sit tight and ride through the turbulence. But given all of the uncertainty in the world today, there is also every reason to believe that Delta stock could go lower in the months to come. Investing in airlines is still not for the faint of heart.
