Bearish sentiment on airlines may be running deep. But some analysts are making a case for the stocks, arguing there’s value in a lagging sector that has a postpandemic recovery path.
Citigroup analyst Stephen Trent reiterated Buy recommendations on several domestic and foreign airlines Wednesday, including
Delta Air Lines
The rationale for airline stocks is getting tougher as it sinks in that the recovery will take longer than hoped. “We are looking at a tough winter with cash crunches,” Trent writes. And it’s hard to be positive on a cyclical sector that isn’t participating in the broader cyclical rally that has lifted transportation and industrial stocks.
“But at a certain point,” he writes, “there’s scarcity value in a lagging sector with post-pandemic legs…the challenge being when and where things normalize.”
Global traffic patterns point to a mixed and uneven recovery. Air travel in the U.S. has improved a bit lately, with more than 1 million passengers going through security checkpoints on Sunday, the highest levels since the early days of the pandemic in mid-March. But that is still well below daily averages above 2 million passengers last fall, and traffic—which fell back to 662,000 passengers on Tuesday—isn’t showing a sustained rebound.
Total traffic isn’t the only headwind—it’s the fares and revenue composition, too. The U.S. recovery is being fueled by leisure and small-business travel, while large-scale corporate and international travel remains severely depressed. Consumers taking short hops to see friends and family may be filling planes domestically, but it isn’t helping the full-service legacy carriers that built route structures based on higher-margin business and international travel.
Global air travel remains broadly depressed. Domestic traffic in China is now higher, year over year, and Latin American markets like Brazil are looking stronger. But travel to European destinations is stagnating. Ryanair, Europe’s largest airline, recently said it would maintain capacity at 40% of last year’s levels through the first quarter of 2021, well below prior estimates of 60% of capacity. Travel restrictions by the European Union “forced” the airline to trim its schedule, Ryanair CEO Michael O’Leary said.
Country-specific travel restrictions remain a big hurdle. Canada, for instance, recently loosened some restrictions, allowing extended family members to visit for the first time since the pandemic started. But the rules remain onerous: Visitors must commit to staying in Canada for 15 days, present a detailed quarantine plan, stay isolated for 14 days, and have written authorization for the visit from Canadian immigration authorities. “Until further notice, most foreign nationals cannot travel to Canada, even if they have a valid visitor visa,” the Canadian government said.
Airlines are cutting their cost structures by 30% to 40% to adjust to lower demand, Trent writes. But the big question remains: When will a sustainable recovery take hold?
J.P. Morgan analyst Jamie Baker is