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Investment Opportunity Breakdown: Airline Stocks

Airline stocks were hit hard by the onset of the Covid-19 pandemic. Travel declined as stay-at-home orders were issued and airplanes were viewed as vectors for transmission of the virus. Covid variants have come and gone since then, and some s…

Airline stocks were hit hard by the onset of the Covid-19 pandemic. Travel declined as stay-at-home orders were issued and airplanes were viewed as vectors for transmission of the virus. Covid variants have come and gone since then, and some studies indicate flying poses a lower exposure risk than previously thought. However, these stocks are still on a long road to recovery as the pandemic ebbs and flows.

When Covid struck, airlines were forced to cancel thousands of flights as would-be travelers followed shelter-in-place orders. When planes did take off, it was often with only 5% to 15% of their total passenger capacity. According to the U.S. Government Accountability Office (GAO), in April 2020, air travel was 96% lower than it was a year prior.

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Airliners responded to the crisis with several budget-cutting measures, ranging from layoffs to the retirement of older aircraft. To mitigate Covid spread, many companies also blocked middle seats and otherwise limited the number of passengers on flights.

Domestic travel has made a comeback since March 2020, with more than 2.3 million travelers flying for Thanksgiving in 2021. The industry is far from fallible — just a month later, the omicron variant of Covid began to spread and contributed to hundreds of flight cancellations. But travel agencies are seeing a large uptick in spring and summer trip bookings. As the pandemic evolves, here’s what you need to know about airline stocks.

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How Covid-19 Changed Airline Stocks

The nature of air travel — several passengers in a small space for prolonged periods — meant the industry needed to adapt quickly to provide a safe flying experience. Masks are now required on public transportation, including flights. Additionally, international travelers entering the U.S. must provide a negative Covid test. Most airlines are also implementing their own policies, such as contact tracing and vaccine requirements for employees.

According to a report by McKinsey, 2020 airline revenues only reached 40% of their 2019 total. When the report was released in spring 2021, the industry was not expected to fully recover to prior levels until 2024 at the earliest.

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As demonstrated by the 2021 holiday season, airline stocks are still at the mercy of Covid-19 variants. Omicron infections have since peaked in several U.S. cities, and more than 60% of the U.S. population is fully vaccinated. But additional variants or negative developments in the pandemic could cause turbulence in these stocks.

However, despite the turmoil of the past two years, airline stocks were relatively resilient to the omicron variant’s effects. In fact, they rallied despite thousands of cancelled flights between Christmas Eve and New Year’s Day at the end of 2021. This indicates these stocks could be less susceptible to fluctuations caused by Covid-19 in the future. 

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What Obstacles Lie Ahead for Airline Stocks?

Airfares still haven’t recovered from their steep decline in 2020. As of January 2022, domestic ticket prices were down 19% from pre-Covid levels. Lower costs could entice more passengers to choose air travel over other forms of transportation, which have skyrocketed in price in recent months.

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However, inflationary pressures could cause consumers to spend less on leisure travel. Additionally, these low prices make it difficult for airlines to turn a profit.

But discounted fares are unlikely to last. Price-booking app Hopper expects domestic airline tickets to rise 7% every month through June 2022. Stronger travel demand and pressure to make up for lost revenue are driving the increase. Airlines are also seeing higher costs, as jet fuel is more expensive than it has been since 2014.

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Ticket sales are making a comeback this year. However, even as domestic travel improves, international and business travel are lagging on the road to recovery. The latter is expected to recover to only 65% to 80% of its previous levels, according to a survey conducted by Deloitte. Business travel has been a significant source of income for airlines, making these numbers problematic.

On the labor side, airlines are experiencing a serious shortage of pilots and other staff. This has resulted in canceled and delayed flights. By December 2021, American Airlines (NASDAQ:AAL) had to cut at least 20% of its flights.

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Southwest Airlines (NYSE:LUV) and Delta Air Lines (NYSE:DAL) have taken several measures to bring in and train new pilots, and several companies are offering pay bumps to attract new hires. For several big-name airlines, pilots need a four-year degree with a six-figure price tag. However, companies like Delta are cutting new hires some slack by reducing the educational requirement.

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How Airline Companies Have Adapted

Now, airliners are looking to move forward and begin recovering from their pandemic lows. They have several obstacles to overcome, and companies have taken unique approaches as they forge ahead.

At the end of the year, Southwest Airlines raised its minimum wage and went on a hiring spree to counter Covid-related labor shortages. It also offered perks for flight attendants to incentivize employees to work for the holidays. Southwest faced a high-profile string of cancellations on Columbus Day weekend in 2021 due to labor shortages, air traffic control and weather issues. During the holiday season, it took these steps to prevent a repeat of the mishap.

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Other major airlines saw mass cancellations during the holiday season — partially related to weather, but also linked to Covid-19. Among them was Delta Air Lines, which has since stabilized with less than 1% of flights cancelled by mid-January. The company was able to turn a profit as early as the second quarter of 2021 as it upped hiring and purchased more aircraft.

United Airlines (NASDAQ:UAL) was also subject to omicron-related cancellations during the holiday season. It took a defensive stance at the onset of the pandemic by maintaining its staff and cutting more flights. As a result, the airline’s performance was more stable in summer 2021 compared to its competitors. United now has more than $20 billion in liquidity to keep it going through the twists and turns of the pandemic.

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As Covid-19 becomes endemic, airline stocks will begin to return to 2019 levels. The 2021 holiday season showed these stocks are sensitive to pandemic-related developments, but unlikely to nosedive again like they did in 2020.

Top Airline Stocks to Watch

On the date of publication, Sydney Sweeney did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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Sydney Sweeney is an assistant editor at InvestorPlace.

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