Buying airline stocks takes a leap of faith

File Photo: Airline stocks have given up the sizable gains made in recent days after Delta Air Lines suggested last week that there could be a boom in leisure travel as soon as this summer (AP)
File Photo: Airline stocks have given up the sizable gains made in recent days after Delta Air Lines suggested last week that there could be a boom in leisure travel as soon as this summer (AP)

Summary

US carriers are hoping that pent-up demand for leisure travel could be unleashed as soon as this summer

Airline stocks are a bet on a summer travel boom. One is certainly possible after a year or more of people being mostly stuck at home, but so far investors have little to go on but hope.

Shares of United Airlines fell around 6% Thursday morning, dragging down peers. The Chicago-based airline on Wednesday reported a $1.9 billion net loss for the fourth quarter and estimated that its first-quarter revenue will be 65% to 70% lower than in the same period of 2019.

Terrible numbers are unsurprising. Even in normal times, airlines struggle to make a profit during the winter months. And after a brief winter-holiday bump, traffic remains depressed amid the continuing Covid-19 pandemic. Corporate travel is expected to take years to recover, which is of particular concern to United’s business-focused network.

Airline stocks have given up the sizable gains made in recent days after United’s competitor Delta Air Lines suggested last week that there could be a boom in leisure travel as soon as this summer. “Visits across Delta’s digital channels are significantly outpacing the passenger volumes we’re carrying," said Chief Executive Ed Bastian, adding that holders of Delta’s co-branded American Express card were keeping their points in anticipation of redeeming them for air travel in 2021.

A poll by brokerage Jefferies published Wednesday showed that 80% of Americans who flew in 2019 plan to do so again this year, most of them in the summer.

This “pent-up demand" thesis is the main reason to buy carriers’ shares right now. They are no longer a bargain after a 25% rally in the past three months. Stifel analyst Joseph DeNardi ventured in a report this week that over the long term, Covid-19 could even help leisure-focused carriers by creating “a period of elevated demand to fly similar to the baby-boom period post World War II."

United CEO Scott Kirby agreed Thursday that “lots of evidence [shows] there is huge pent-up demand and you’ll see a really steep inflection," but he is less certain that it will happen as early as this summer. This is probably what disappointed investors.

Those banking on summer relief should tread carefully. Bookings have yet to pick up. Before Covid-19, 70% of tickets were bought no later than 90 days before departure. Spring break demand started to materialize around January, and summer demand around Easter. Now, the same percentage isn’t booked until two weeks before departure. The recovery probably won’t be detectable ahead of time.

Jefferies’s poll also showed that only 21% of respondents plan to fly more in 2021 relative to 2019, and 32% planning to fly less. Even looking further ahead, a boom isn’t necessarily a done deal.

Another problem is that anticipating a rush of demand may prompt the cutthroat airline industry to offer too many seats, thus depressing fares and reducing the chances that the third quarter will be profitable. The 2020 summer season showed that sun-seeker demand can return very quickly when restrictions ease, but also that ticket pricing in times of uncertainty is extremely soft.

A post-pandemic surge in leisure travel is a possibility investors need to look for. But, as United’s Mr. Kirby rightly said Thursday, “hope is not a strategy." For now, it may pay to downplay faith in favor of data.

This story has been published from a wire agency feed without modifications to the text.

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