A sharp rebound in airline stocks during the fourth quarter will soon be tested for the first time when US carriers start reporting fourth quarter earnings starting this week. One of the key players, Delta Air Lines (NYSE :), will kick off the industry's earning season on Thursday, January 4, before the market opens. Investors will focus on the cash burn rate and any sign of recovery in business travel.
After a drastic decline in travel demand over the past 12 months, some investors are starting to feel comfortable owning airline stock. Following the vaccine breakthroughs in November, airline stocks surged, pushing the world's largest airline-focused ETF, the US Global Jets Fund (NYSE :), higher. It's up 22% in the last three months.
That meeting showed investors confidence that successful vaccine development will help improve travel demand and ultimately benefit the most battered members of the stock market. The pandemic ended the decade-long string of profits enjoyed by airlines, causing losses of more than $ 20 billion for the segment last year.
But a reversal in the demand for travel may not come too soon. There may be significant slowdown amid rising coronavirus cases and the discovery of more contagious variants.
As Delta reports tomorrow, analysts expect an average loss of $ 2.42 per share on sales of $ 3.81 billion. The airline's CEO, Ed Bastian, told employees in a New Year's note that the airline continues to strive for spring in a 'year of recovery'.
Delta Air Weekly Chart.
Still, Bastian warned that demand for travel will initially remain "deeply suppressed," with the company's focus on passenger health and safety:
"While I am optimistic this will be a year of recovery, the continuing uncertainty of the pandemic means we must be agile, ready to change course and adapt to an ever-changing environment."
Not a Convincing Story
Shares of Delta Air closed at $ 40.30 yesterday, after gaining 20% ??in the past six months. Even with this jump, Delta shares are still down more than 30% compared to last year this time. Shares of American Airlines (NYSE: NASDAQ :), the most troubled major US carrier, remain 45% lower.
Weekly chart from American Airlines.
Even considering a possible reopening of the economy later this year, airline stocks are not a convincing investment in our view. Airlines are highly unlikely to achieve the kind of profit margins that accompanied the longest US economic expansion before the 2020 recession. A key factor is the grim business travel outlook, driving up demand for premium seating before the pandemic.
In a recent note, Cowen & Co. analyst Helane Becker highlighted these headwinds, describing Delta Air's optimism as "aggressive" as business travel is down 85% and the only business traveler now flying, seem to be small and medium travelers. -big companies.
Becker wrote:
"Delta had hoped for a business travel recovery in 2H21, but it is becoming increasingly clear that business travel will not make a meaningful contribution to revenue in 2021 as vaccination timelines continue to shift."
By some estimates, the business category could shrink by as much as 15% due to the video conferencing trend that boomed during the pandemic.
According to Deutsche Bank, US airlines will continue to grapple with record debt of $ 170 billion. That means "airlines have no choice but to spend most of their free cash flow on paying off debt," the bank said in a recent note.
Still, investors can find interesting growth stories in the airline industry, especially from low-cost airlines such as Southwest Airlines (NYSE 🙂 and Allegiant (NASDAQ :), which are able to win in a world of cheap fares.
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Bottom Line
Investors should be selective in choosing airline stock as it is nearly impossible for some major airlines to return to their normal operations in 2021. This earning season will likely show that the time to bet a lot on them has not yet come.
