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Are Airline Stocks A Good Bet As Travel Demand Surges?

By Investing.com (Haris Anwar/Investing.com)Stock MarketsMar 17, 2022 09:58AM ET
www.investing.com/analysis/are-airline-stocks-a-good-bet-as-travel-demand-surges-200620172
Are Airline Stocks A Good Bet As Travel Demand Surges?
By Investing.com (Haris Anwar/Investing.com)   |  Mar 17, 2022 09:58AM ET
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Since the pandemic hit in March 2020, travel bookings collapsed as lockdowns proliferated. And as each new COVID wave seemed to fade, sentiment on the sector began to recover. But with each new variant of the virus investors have seen many false starts for the badly-hit industry. This year has been no different.

Just as the rebound in air travel was taking hold after the rapid spread of the Omicron variant last winter, rising fuel costs now seem to be dampening the sector’s growth outlook again. As a result, the U.S. Global Jets ETF (NYSE:JETS) recorded a 13% loss during the past month. It closed on Wednesday at $20.35.

JETS Weekly Chart
JETS Weekly Chart

Amid growing global energy constraints due to Russia’s invasion of Ukraine, airlines are now projecting jet fuel to cost $2.80 to $3 a gallon this quarter, up from previous estimates of around $2.50.

These figures could potentially derail efforts to return to profitability for most U.S. airlines as they try to recover from the collapse in travel during the coronavirus pandemic.

Airline executives, however, remain optimistic. They told investors this week that travel demand is rebounding quickly and that the prospect of passing inflationary pressures to the final consumer will likely secure profitability in the upcoming quarters.

Capacity Cuts

Several of the largest carriers, including United Airlines (NASDAQ:UAL) and American Airlines (NASDAQ:AAL), have cut their seat capacity forecasts for the first quarter. That's a move that will help them fetch higher ticket prices.

UAL Weekly TTM
UAL Weekly TTM

United’s first-quarter capacity will be 19% below 2019 levels. For Southwest Airlines (NYSE:LUV) this metric will drop as much as 10% compared with the same quarter in 2019, while Delta (NYSE:DAL) will fly about 17% less capacity this quarter than in 2019.

United sees “unprecedented leisure demand,” according to Andrew Nocella, the airline’s chief commercial officer. He added, in a Bloomberg report:

“People want to get back out. Business traffic is booming, although we still have a long way to go.”

However, these encouraging air traffic trends can’t hide that airline shares have been a poor investment for several years now. For instance, the JETS ETF is down 27.2% during the past five years, during which the S&P 500 rose 82.7%.

Furthermore, even if leisure traffic continues to rebound, there is only a slim chance the business travel segment—the most profitable for airlines—will return to pre-COVID levels any time soon.

For these reasons, analysts are not excited about airline stocks. Seaport Research, while downgrading American Airlines to neutral from buy, said in a recent note:

“Energy market chaos tied to the Russia/Ukraine war and a supply/demand dynamic poorly calibrated for the industry’s new cost structure prompt us to capitulate on weaker balance sheet stories.”

Bank of America said travel demand should outpace supply, particularly during peak leisure times, but it will not create enough pricing power for airlines to offset higher fuel costs.

The next stage of growth for airlines, which will depend on business travel, is still facing an array of uncertainties including the shape of potential new COVID variants and escalating geopolitical risks. In addition, businesses are unlikely to resume worker travel when inflation is surging and managers are looking to cut costs.

Bottom Line

Despite a rebound in air travel, airline stocks don’t make a compelling investment case for long-term investors. These carriers continue to face numerous challenges, including higher fuel costs, a cut-throat competitive environment, and the potential emergence of new coronavirus variants.

Are Airline Stocks A Good Bet As Travel Demand Surges?
 

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Are Airline Stocks A Good Bet As Travel Demand Surges?

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Comments (9)
AmirMohammad javi
JOHEN Mar 22, 2022 3:38PM ET
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bom bom $$$$$$
Sangseok Lee
Sangseok Lee Mar 18, 2022 9:11PM ET
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Anyway airline industry and stocks will rebound in the near future. The point is the timing
Sangseok Lee
Sangseok Lee Mar 18, 2022 9:11PM ET
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Anyway airline industry and stocks will rebound in the near future. The point is the timing
Sangseok Lee
Sangseok Lee Mar 18, 2022 9:10PM ET
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Anyway airline industry and stocks will rebound in the near future. The point is the timing
Zman Trading
ZmanTrading Mar 18, 2022 11:31AM ET
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Buy Norwegian Air Shuttle.
Jayboe music
Jayboe music Mar 17, 2022 4:39PM ET
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hi bro I ask for how to invest online I need your help sorry for disturbance
Nelson Manning
Nelson Manning Mar 17, 2022 10:05AM ET
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new variants....that is funny
pavel zissu
pavel zissu Mar 17, 2022 8:21AM ET
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So...you say jet fuel price increase of .30- .50 cents more a gallon because of the war is going to be a problem for airlines? In Chicago cost me double per gallon of what i used to pay during Trump era like $5.95 instead of $3. I don't know how many gallons it takes to fly from New York to London for example let's say 2200 gallons at that .50 cents increase that you are saying adds about $1100 per flight divided by 250 pasangers it comes a bit more than $4 per passenger...i will gladly take that and Buy airlines stock right now.
pavel zissu
pavel zissu Mar 17, 2022 8:21AM ET
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correction....22000 gallons and not $4 more but $40 more per passenger but doesn't affect buying the stocks right now.
Jayboe music
Jayboe music Mar 17, 2022 8:21AM ET
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sorry bro how can I invest online for the platform
Mohd Izhar Muslim
Mohd Izhar Muslim Mar 17, 2022 4:48AM ET
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Thanks 👍
 
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