What happened
The military conflict in Europe is adding a fresh complication to the travel industry's pandemic recovery. Shares of Delta Air Lines (DAL 4.05%), United Airlines Holdings (UAL 1.59%), and American Airlines Group (AAL 1.51%) all traded down as much as 5% on Monday as investors attempt to assess what comes next for the U.S.'s internationally focused airlines.
So what
Airline stocks are dealing with another unexpected headwind as the industry attempts to move past the pandemic. COVID-19 starved the industry of revenue, causing companies to take on significant debt to survive. As vaccines have gained traction, we've seen the beginnings of a recovery, though it will still take years for airlines to get their balance sheets back in order.
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The war in Europe threatens to further complicate the recovery. Full-service airlines like Delta, United, and American tend to generate higher margins on international flights, and access to all corners of the globe is a key selling point for an airline trying to win lucrative corporate contracts. But in response to Russia's invasion of Ukraine, airspace connecting Europe to Asia has been significantly restricted. At best, that is going to add to costs as airlines try to fly to all corners of the globe, and at worst, it means a cutoff in service to certain regions.
Delta is the U.S. airline with the most exposure to Russia, but the company on Friday suspended its codeshare with Russian national airline Aeroflot. (Codesharing is a common arrangement by which two or more airlines market the same flight, each using its own flight number.)
More broadly speaking, the international recovery was already trailing the domestic travel rebound. The conflict adds a new twist to any forecast for a return to normal, which could mean it will take longer than investors had hoped for these airlines to rebuild their balance sheets.
Throw in the higher oil prices due to the crisis -- fuel accounts for between 20% and 30% of an airline's total cost -- and there isn't much reason for investors to be excited about these companies right now.
Now what
The only reason for buying into airlines right now is a focus on the long term. The industry is unlikely to fly out of turbulence this year, and 2023 is still very much in doubt, but there is good reason to be bullish on long-term travel demand as the world recovers from the pandemic and we see the rising middle class in emerging markets become more mobile.
The International Air Transport Association, an airline trade group, forecasts global travel volume will grow 3.3% annually through 2040.
For those with the stomach to ride out the recovery, Delta in particular looks like a strong choice because of its best-in-class management, competitive cost structure, and international investments. But be forewarned that the recovery will take time, and as we have seen over the past two years, it is hard to predict what challenges lie ahead. There's no reason to rush to buy on Monday's downdraft.
