Airline Stocks: Time To Fly?

Investing in airline stocks has historically been a risky move, with the industry's volatile nature and high operating costs making it difficult to turn a profit. However, the post-pandemic landscape has created new opportunities for investors.

The COVID-19 pandemic caused a significant drop in airline revenues and share prices, but the industry has been recovering since. Travel demand returned in 2022, and while new challenges such as the conflict in Ukraine and pilot shortages have emerged, the major airlines appear to have weathered the worst of the storm.

With the pandemic ending and countries returning to economic growth, the aviation industry is now rebuilding, and there are several investment opportunities available.

The impact of COVID-19 on the industry

The COVID-19 pandemic had a profound impact on the aviation industry. In April 2020, passenger traffic was 96% lower than in April 2019 and remained 60% below 2019 levels throughout the year. The pandemic caused airline revenues and share prices to fall. Airlines haemorrhaged $168 billion in economic losses in 2020, with revenues plummeting by 55%.

The pandemic's effects rippled across the aviation sector, hitting airports, repair shops, and the supply chain. Airlines parked or retired many aircraft, reducing demand for maintenance services. The pandemic also exposed the vulnerability of most airports, which have high fixed costs and variable revenue flows.

However, the cargo airline subsector was a bright spot, benefiting from increased demand for air cargo and high freight rates.

The pandemic also caused changes in travel demand patterns, with the shift to "work from home" and "work from anywhere" creating year-round demand for leisure travel. This helped smooth out the historically highly cyclical nature of the industry, where demand spikes in the summer and falls in January.

The recovery from the pandemic has been choppy, with new variants disrupting travel patterns. However, travel demand returned strongly in 2022, leading to congested airports and lost baggage. The upswing in demand has continued into 2023, with airline revenue sky-high and some of the largest carriers returning to profitability.

Despite the challenges, US airlines survived the pandemic without any major bankruptcies, and the industry has proven its resilience in the face of tough operating conditions.

The risks of investing in airline stocks

The airline industry is a fascinating yet risky sector to invest in. Here are some of the risks of investing in airline stocks:

Industry Crises and External Factors

The airline industry is susceptible to various external factors and crises, such as the COVID-19 pandemic, which caused a significant drop in revenue and share prices. While the industry has shown resilience, with some airlines receiving government aid, it has not fully recovered to its pre-pandemic state.

Financial Losses and Bankruptcy

Airlines around the world incurred substantial financial losses during the pandemic, with an estimated loss of $118 billion in 2020. Several airlines went bankrupt, and those that survived continue to navigate economic challenges.

High Operating Costs

Airlines have high operating costs, including fuel, labour, and maintenance. Fuel costs can be volatile due to oil price fluctuations and contribute significantly to an airline's total expenses. High operating costs can lead to cash flow issues and negatively impact profitability.

Competition and Market Dynamics

The airline industry is highly competitive, with low-cost carriers gaining market share by offering cheaper prices. This competition can drive down fares and impact the profitability of full-service carriers. Additionally, the industry has seen consolidation, with a small group of major airlines dominating the market, which can limit opportunities for new entrants.

Cyclical Nature and Economic Sensitivity

The airline industry is cyclical and closely tied to economic cycles. When the economy slows down or enters a recession, business and consumer travel tend to decrease, leading to a decline in demand for air travel. This sensitivity to economic conditions can make airline stocks more volatile and risky.

Regulatory and Operational Challenges

Airlines are subject to strict regulatory oversight, safety standards, and labour relations dynamics. They also face operational challenges, such as pilot shortages and schedule disruptions, which can impact their reputation and financial performance.

Investing in airline stocks carries these and other risks. It is essential for investors to carefully consider these factors, conduct thorough research, and assess their risk tolerance before making any investment decisions.

The benefits of investing in airline stocks

Investing in airline stocks can be a risky business, but it also comes with several benefits. Here are some of the advantages of investing in airline stocks:

Diversification

By investing in an airline exchange-traded fund (ETF), investors can gain exposure to a basket of airline stocks, reducing the risk associated with investing in individual airline companies. This diversification ensures that if one airline underperforms, the overall impact on the investment is minimised.

Industry Exposure

Airline ETFs offer investors access to the broader airline industry, allowing them to benefit from its growth and resilience. This means that investors can profit from the industry's overall performance rather than relying solely on the success of a single airline company.

Convenience and Accessibility

ETFs are traded on major stock exchanges, making them easily accessible to investors. They can be bought and sold throughout the trading day, providing flexibility and liquidity. Investors can purchase airline ETFs through standard brokerage accounts, just as they would with individual stocks.

Cost Efficiency

Airline ETFs typically have lower expense ratios than actively managed funds, making them a more affordable investment option. Lower expenses can positively impact long-term returns, benefiting investors.

Professional Management

ETFs are managed by experienced professionals who make investment decisions on behalf of the fund. This saves investors time and effort in researching and selecting individual airline stocks, allowing them to benefit from the expertise of fund managers.

Liquidity

Airline ETFs generally have higher trading volumes, resulting in greater liquidity. This liquidity enables investors to enter or exit their positions more easily without significantly impacting the ETF's market price. It provides flexibility and ensures efficient execution of investment decisions.

Risk Mitigation

By investing in an airline ETF, investors can diversify their exposure across multiple airlines, reducing the impact of negative events specific to a particular company. This diversification helps mitigate risks associated with unforeseen circumstances, such as economic downturns, fuel price fluctuations, or industry-specific challenges.

Dividends

Some airline ETFs distribute dividends, providing a potential income stream for investors. This adds to the overall return on their investment and can be an attractive feature for those including dividend investing in their strategy.

The best airline stocks to buy right now

Airline stocks have been heavily impacted by the coronavirus pandemic, but with positive vaccine news, investors are excited about the future of the industry. Here are some of the best airline stocks to consider buying right now:

• American Airlines Group Inc. (AAL) : One of the largest airline companies in the world, American Airlines has seen its stock move higher with the news of vaccine distribution. The company reported revenues of $3.2 billion in the third quarter, a 73% drop year-over-year, but still beating Wall Street expectations.
• United Airlines Holdings (UAL) : Analysts from JP Morgan are optimistic about United Airlines' ability to absorb the current downturn and see potential upside from its current valuation. The positive vaccine news is also great for the company's plans to jumpstart its business.
• Southwest Airlines (LUV) : Southwest Airlines is the nation's largest domestic air carrier and has maintained a strong balance sheet during the pandemic. The company reported a net loss of $1.2 billion in the third quarter but has liquidity of $15.6 billion, more than enough to cover its current outstanding debt.
• Delta Air Lines, Inc. (DAL) : Delta Air Lines provides scheduled air transportation for passengers and cargo in the US and internationally, with hubs in Atlanta, Minneapolis-St. Paul, Detroit, and Salt Lake City. The company has international networks centred on hubs in Amsterdam, Mexico City, London-Heathrow, Paris-Charles de Gaulle, and Seoul-Incheon.
• Spirit Airlines, Inc. (SAVE) : Spirit Airlines offers customers unbundled base fares, allowing them to choose additional options at an extra charge. The company has a flexible operating model, and its flight crews are interchangeable across all aircraft, simplifying maintenance and support services.
• Alaska Air Group (ALK) : Alaska Air Group operates two airlines, Horizon and Alaska, and flies to 115 destinations with more than 1,300 daily departures. In 2019, the airline carried a record 47 million guests and earned $769 million in consolidated income. The company has also maintained 16 consecutive years of profitability on an adjusted basis.

The future of the aviation industry

The aviation industry has been one of the sectors most affected by the COVID-19 pandemic. In 2020, the industry's revenues totalled $328 billion, around 40% of the previous year's. The sector is expected to be smaller for years to come, with traffic not predicted to return to pre-pandemic levels until 2024.

However, the pandemic has also created new opportunities for airlines. Leisure travel is expected to recover faster than business travel, and remote work and flexible working arrangements are likely to remain in some form post-pandemic, meaning people will take fewer corporate trips. Airlines that can adapt to this new reality and cater to leisure travellers may be well-positioned for the future.

The pandemic has also accelerated trends such as digitalisation and the phasing out of less efficient aircraft. Airlines will need to continue investing in technology and automation to improve the customer experience, enhance decision-making, and drive efficiency.

Another key trend in the aviation industry is the development of more environmentally friendly aircraft. Hydrogen-powered planes could enter the market as soon as 2035 and would provide a cleaner energy source while carrying more passengers per flight.

Other innovations that may shape the future of aviation include blended wing designs, double-decker economy seats, air taxis, and the return of supersonic flights.

While the aviation industry faces challenges in the post-COVID era, there are also opportunities for growth and innovation. Airlines that can adapt to changing consumer behaviour, invest in technology, and embrace more sustainable practices may be well-positioned for the future.

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