While many key industries within the equity markets have learned to roll with the punches that the Covid-19 pandemic continues to deliver ad-hoc, it has to be said that airline stocks are still almost as vulnerable to changes in the pandemic’s trajectory as they were at the onset. The recent rise of the Omicron variant has played havoc with their recovery progress, the fact that it’s proving to be a much less severe strain of the virus than its predecessors matters little when it’s still resulting in huge numbers of airline flight crew members calling in sick.
More than 2,000 flights were canceled on Christmas Eve alone as staff shortages reached critical levels, showing just how susceptible the airline industry remains to future infection waves. But while the overall industry might struggle to be called a safe bet for the foreseeable future, let’s take a look at two of the more well-known names and see if there’s any potential upside to be had in light of the recalibrated risk profile.
American’s shares were among the quickest to bounce after the whole industry was decimated in the first quarter of last year, but the recovery ran out of steam this past summer. Shares are down 30% from their recovery high and in danger of cementing a dirty-looking downtrend as we head into 2022.
This is unfortunate for investors as their most recent earnings report showed that they weren’t all that far away from matching their pre-pandemic numbers. Revenue was up 183% year on year, an impressive number but a little empty considering it was almost nil in 2020, but still well ahead of analyst expectations. At the time management was expecting their Q4 numbers to be back within 11-13% of the same quarter in 2019, and will surely be hoping that the disruption caused by Omicron won’t adversely affect that.
As CEO Doug Parker said with the results, the key to American getting back to consistent profitability lies in the successful rebound of their business travel segment, as well as their international traffic numbers. Based on stock performance, Wall Street is backing them to be among the first to get there. Of the three majors covered in this article, American is the only one that’s come close to beating the S&P 500 index for the year. It relinquished the lead late last month but is within a few percent of retaking it.
Earlier this quarter Delta reported that their passenger revenue was back to more than 60% of the same period in 2019, with CEO Ed Bastian predicting at the time a clean return to pre-pandemic levels by the next summer. If Wall Street believes him they certainly aren’t showing it, as, like American, Delta’s shares have been trickling lower throughout the second half of this year.
However, there are bullish signals starting to appear that are worth noting. Earlier this month, Delta presented its strategic priorities at a Capital Markets Day event in New York, which covered plans to expand its platform, leverage competitive advantages, and achieve “meaningful profitability” in 2022. Management’s top financial priority is restoring its financial foundation, “with a focus on efficiency and cash generation to achieve investment grade metrics by 2024”.
The team over at Deutsche Bank was sufficiently impressed to call the delivery a “master class” and believe that Delta has set a benchmark for other airlines to follow. They maintained their Buy rating on the stock, with a $55 price target suggesting there’s an upside of close to 40% to be had from where shares closed last night.
Analyst Mike Linenberg went on to note that “while some investors were critical of Delta’s 2022 headline CASM-ex growth forecast of up 7% - 10% versus 2019, we note that it is based on flying 10% fewer seat miles than 2019. Management also embraced a less is more view with respect to capacity deployment and reiterated their commitment to adjusting supply to demand rather than using it as a lever to achieve unit cost goals. Moreover, Delta is on track to be profitable in the December quarter."
This should give investors plenty to chew on as we head into the new year. The airlines face an uphill road to full recovery, but these two, in particular, seem to be making the best of a bad situation. If you can stomach a bit of turbulence in the near term, the longer-term potential
appears to be there.
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