Airline shares, one of the most popular reopenings, are not moving in the direction investors had hoped.
The US Global Jets ETF (NYSE:) has lost more than 15% in the past quarter, just as more and more people are taking the plane after a long pandemic hiatus. The U.S. Transportation Security Administration said on Friday that airport screenings have risen above 2019 levels for the first time since the outbreak of the health crisis, indicating strong demand for travel for the summer months.
The strength of the US travel recovery is also reflected in the capacity constraints faced by airlines. Many leading US airlines are rushing to add pilots and ground staff who were laid off last year due to the slump in travel demand. Southwest Airlines (NYSE:), for example, offered flight attendants and ground staff double pay to run extra shifts during the July 4 holiday.
Another sign that airlines have better days ahead, United Airlines (NASDAQ:) said last week that it is ordering 270 narrow-body aircraft from Boeing (NYSE:) and Airbus (PA:) — the largest order ever for aircraft. The airline is also busy hiring new aircraft as it plans to add about 25,000 employees, including pilots, flight attendants and mechanics. United expects to post pre-tax adjusted income next month for the first time since January 2020.
One possible explanation for this bearish spell in aviation stocks, despite the simultaneous rise in travel demand, is that easy money has already been made in this trade. The next phase of growth, which will depend on the resumption of international and corporate travel, still faces a variety of uncertainties as new COVID variants emerge and businesses seek to cut costs. ]
On a webcast last month, Ed Bastian, chief executive of Delta Air Lines (NYSE:) said the airline would operate twice as many domestic flights in July as it did in May. Still, "business travel is very limited at the moment," he said.
Delta Air Lines Weekly Chart.
For many executives and employees, business travel may not be necessary in the future as they feel comfortable dealing with their clients' needs through video conferencing. Some executives are now planning to meet with their employees via video calls.
In sales, some professionals say they've found that online meetings even offer them certain advantages over face-to-face pitches, according to a recent study in the Wall Street Journal.
These anecdotes from industry experts suggest that investing in airline stocks is now a long-term bet with the belief that long-haul travel – the most profitable segment for airlines – will recover at some point, allowing these airlines to regain the sales they made before the pandemic. After 9/11, the airline industry took six years to recover.
In this segment, Delta emerges as an attractive long-term purchase. Analysts at Jefferies recently upgraded the stock to buy on hold, saying in a note that it is well positioned to benefit from the evolving economic recovery. About half of DAL's revenue is business, with 50% of that exposure to small and medium business travel.
International travel should also be a strong point for Delta, given its excessive exposure to Europe, Jefferies said. The company raised its price target for Delta to $60 a share from $50. The new target is about 40% above where the stock traded Wednesday, when it closed at $42.54.
Spirit Airlines weekly chart.
To analysts at Citi, low-cost carrier Spirit Airlines (NYSE:) also looks cheap. They say the stock's recent struggles have "opened up value in the stock" and they have updated the guidance signals that it was time to buy the dip. Their note read:
"The costs associated with restarting some operations seem poised to put more pressure on ex-fuel [cost per available seat mile] than we previously expected as fuel prices continue to rise. Travel demand indicators however, summer 2021 also seems poised to support domestic leisure-oriented passenger revenues.”
Citi raised its price target for Spirit by $2 to $42 a share, which is more than 40% higher than where the stock traded Wednesday, when it closed at $29.06.
Starting point
Majority of airline stocks already reflect a strong rebound in domestic travel following the introduction of vaccines in the US. The next phase of growth relies heavily on the resumption of international and business travel.
Airlines with strong exposure to this segment, such as Delta, will benefit.
