Airline stocks continue to remain a risky bet despite last year’s strong recovery in passenger traffic. The fast spread of the Omicron variant and escalating fuel prices have clouded the sector’s growth outlook, just when it began to recover from one of the steepest travel declines in recent history.
- Reports Q4 2021 results on Thursday, Jan. 20, before the market opens
- Revenue Expectation: $9.31 billion
- EPS Expectation: -$1.54
</p>AAL Weekly TTM
The most beleaguered among the US carriers, American Airlines (NASDAQ:) will likely reflect these challenges in its fourth-quarter earnings tomorrow. According to analysts’ consensus estimate, while sales are forecast to double compared with Q4 2020, the company will show a loss that widened during the period.
In October, the company warned that higher fuel costs could delay its after the pandemic-inflicted losses.
Fuel costs vie with labor as the most significant expenses for carriers, and persistently higher prices could help derail efforts by most US airlines to resume making profits after the collapse in travel during the coronavirus pandemic. American Airlines spent $1.95 billion on fuel and taxes in the third quarter alone, triple the amount from a year earlier.
Along with rising costs, the explosive growth of Omicron infections in the US has added another layer of uncertainty. The disease and the bad weather were responsible for about 20,000 flight cancellations during the busy holiday season.
Delay in Recovery
Last week, Delta Air Lines (NYSE:) told investors that the rapidly spreading Omicron variant would delay a recovery in travel by at least 60 days and contribute to a first-quarter loss. With coronavirus cases expected to peak in the US in the next seven days, the pace of improvement in travel should resume its original December trajectory in the second half of February, Delta said in its .
These risks have kept airline stocks under persistent pressure since the past summer. AAL stock is down about 29% since its June high. It closed on Tuesday at $17.90 after falling more than 3%.
Despite the pandemic uncertainty and cost pressures, the trend in air traffic in this Omicron environment shows that travelers are much more willing to take flights now than they were last year. According to the Transportation Safety Administration data, recent airport traffic is at about 85% of the pre-COVID peaks seen in late 2019—not as good as the nearly 90% posted over the Thanksgiving weekend, but better than some investors had feared.
However, these encouraging air traffic trends don’t hide that airlines have been a lousy investment for investors for many years. The U.S. Global Jets ETF (NYSE:) is down 23.5% over the past five years, a period in which the more than doubled.
And even if domestic traffic rebounds next year, there is little chance the business segment—the most profitable for airlines—will return to pre-COVID levels quickly. The next stage of growth for airlines, which will depend on the resumption of international and business travel, is still facing various uncertainties as new COVID variants emerge and all types of companies look to cut costs.
Airline stocks aren’t a compelling investment case. The sector faces various challenges, including higher fuel costs, labor shortages, and the potential emergence of new coronavirus variants. Amid these headwinds, it doesn’t make sense to own airline stocks when there are other potential opportunities in the market.
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