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Should Investors Prepare for Takeoff?

Wednesday, April 21, 2021 03:35 PM | Neal Farmer

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Should Investors Prepare for Takeoff?

Markets continue to reach new all time highs as the economy moves closer and closer to fully reopening and vaccines are distributed at a growing rate.

Stocks from almost all industries have been on the rise as a result with financial, industrial, real estate, and energy firms gaining ground after lagging behind tech for most of the recovery. However, travel stocks continue to lag behind with airlines and cruises especially still feeling the effects of the pandemic.

Why Are Airlines Lagging Behind?

This was almost always going to be the case for these companies as flying requires you to be in a tightly enclosed area with other people... unless you have private-jet kind of money. Additionally, airlines always a pretty cyclical industry as travel costs such as vacations are one of the first things to be cut from household budgets when harder times hit. Obviously, millions of people have been heavily impacted by the coronavirus and lost their jobs either temporarily or permanently, leading to fewer fliers even if they were willing to assume the risk of flying during the pandemic. The pandemic has also had an outsized negative impact on business travel, which usually is a bit less dependent on consumer spending.

Finally, perhaps the biggest obstacle to overcome for these airlines is that for the biggest ones they are operating a global business in a time where there are lots of limits on travel between countries. Shares of United States-based businesses have done well recently as vaccines are administered at a high rate, but most of the world is far behind the U.S. in delivering vaccinations with some countries still continuing lockdown measures as new cases fluctuate. There may be many people who have been able to work from home over the past year and want to take a trip to Europe, but regulations in some countries still aren’t allowing international travel and current coronavirus numbers abroad may deter many from being willing to travel regardless.

Passenger Trends

Recent earnings numbers from airlines suggest that passengers are returning but at a slower rate than desired. TSA daily screenings are around 1.4 million people a day currently, that number is way up from the 100,000 a year ago when most countries were in full lockdown. However, screenings are still down significantly from about 2.3 million in April 2019 before anyone knew what COVID-19 was. The good news for airlines is that screenings have nearly doubled from where they were to begin the year when vaccines were just starting to be delivered. In January, screenings hovered between 500,000 and 900,000 for the most part. That said, first quarter earnings for many airlines does not reflect much from the vaccine efforts, but daily TSA screenings for the month of March were near the current 1.4 million as the growth has steadied as of late.

Disappoint Earnings Results So Far

Earnings season has not been kind to airlines. Delta (DAL) kicked things off with a miss with a loss of $3.55 per share against estimates for -$2.75. That number is way below the -$0.51 from a year ago quarter that was the first reported negative earnings since 2012 for the company. EPS for the first quarter was even down from the previous two quarters despite the vaccination progress, although that was heavily impacted by the holiday season in the fourth quarter and warmer weather in the third quarter. Delta did manage to just beat out revenue estimates with a reported $4.15 billion in first quarter. For reference, first quarter revenue is down 51% year-over-year and that includes an already somewhat impacted quarter last year at the beginning of the pandemic.

After the disappointing results from Delta, there was some hope that United Airlines (UAL) might get things back on the runway. Sadly, that did not happen. United missed on both earnings and revenues and saw its stock drop sharply as a result. Analysts expected earnings per share of -$6.90 but UAL reported -$7.5 and underperformed revenue estimates by $400 million with its $3.2 billion in first quarter revenue. Thus, revenue for the first quarter was down even more than Delta with it dropping 68.7% year-over-year.

Yet to report quarterly earnings this week is Southwest Airlines (LUV). Analysts are expecting earnings per share of -$1.87, down from $-0.15 in the year ago quarter. Additionally, revenue estimates currently sit around $2.02 billion, down from the $4.23 billion a year ago.

Wrapping Up

Airlines predictably continue to struggle as the end of the pandemic is in sight but still not yet here. There’s an argument to be made for investing now as share prices remain significantly below where they were before the pandemic and many other stocks appear to be way overvalued at the moment. However, concerns over how long it will take to fully recover for these industries still needs to be on investors' minds as will the future of business travel if remote meetings replace some significant portion of business trips.

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