What happened
Travel-oriented names were up big on Tuesday, with Carnival (CCL 7.27%), Norwegian Cruise Line Holdings (NCLH 7.56%), and JetBlue Airways (JBLU -3.31%) up 7.7, 6.5%, and 4.8%, respectively, as of 12:15 p.m. ET.
Oil prices were crushed on Tuesday, down 7.3% to around $96.50 per barrel. Since oil prices are so important not only for these companies' cost structures but also customer demand, these three companies almost act like oil's mirror image. Given how much they have been beaten down, no wonder they are rocketing higher today.
So what
Despite ongoing concerns over tight supply, oil was plunging on Tuesday, most likely due to fears of a potential recession, as well as more lockdowns in China as a result of a wave of omicron coronavirus infections in that country. Making matters worse, Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, said on Tuesday that the new BA.5 subvariant of COVID-19 "substantially evades" the protection of both vaccines and prior infection.
While the new variant doesn't increase risk of hospitalization or death, it could lead to people working from home more, and it could lead to more lockdowns in China, which has pursued a "zero COVID" policy thus far since March.
Of course, wouldn't another wave of the coronavirus be bad for travel stocks, too? One would think that would be the case, but since vaccinations and boosters give most people a good chance of avoiding the hospital, it appears many people would still travel even with the elevated risk of infection -- at least thus far. Obviously, investors will have to see how people react worldwide as the BA.5 variant makes its way through the population.
While high oil prices and food inflation have eaten into consumer disposable income, it appears consumers still want to travel, at the expense of physical goods. Carnival reported results in late June showing a strong sequential improvement in revenue and occupancy, along with a doubling of bookings for future cruises over the first quarter. On the other hand, one analyst showed some price softness for cruises in 2023 and 2024, as consumers have become a bit more price sensitive. Chalk that up to inflation, which has been caused by high fuel prices, food prices, and labor shortages. Therefore, any easing on those inflationary fronts could be a boon for travel.
JetBlue is also in the midst of an attempt to purchase Spirit Airlines (SAVE 1.32%), and it is engaged in a bidding war with Frontier Group Holdings (ULCC 3.04%) for the business. However, given the general spike across multiple airline stocks today, that didn't seem to be affecting JetBlue's share price on Tuesday.
Now what
All three of these stocks had been beaten down in June and into July before today, as higher-than-expected inflation prompted the Federal Reserve to hike the federal funds rate by 75 basis points on June 15, more than initially expected. That prompted fears the Fed would force the economy into recession in order to get prices under control. However, if oil prices ease on their own, it's possible the Fed won't have to go quite as far.
Still, it's hard to know anything for certain right now, and today is only one day. Investors will get a better idea of the inflationary picture tomorrow, when the Bureau of Labor Statistics releases the Consumer Price Index figures for June.
Zooming out, it's a bit difficult to get enthusiastic about any of these three stocks for the long term yet, although there could be significant upside if the Fed manages a "soft landing" -- bringing inflation down without a recession. Still, that's a risky bet.
Both Carnival and Norwegian are dealing with the huge debt loads they had to take on during the pandemic, and they will need several years of good operating results just to claw their way out of their difficult balance sheets.
JetBlue is in a bit of a better position, but if it wins its bidding war for Spirit, it will also have to take on lots of debt to fund its all-cash offer. The danger there is that JetBlue acquires Spirit just as the economy is about to go into a downturn. That could lead to problems akin to what the cruise stocks are experiencing now, as they bleed cash while trying to get back up to speed and avoid a default. The long history of airline industry bankruptcies shows this is not an insignificant risk.
So while this was a nice one-day reprieve for these three stocks, each is still very risky. Volatile oil prices and highly levered balance sheets can make for exciting one-day spikes, but they can just as easily lead to big declines.
