As more people are getting comfortable with flying again, airline companies may be a runway success.
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5 min read
This story originally appeared on MarketBeat
Are you planning to travel by air in the coming months? You wouldn’t be the only person hitting the skies, as more and more Americans are getting vaccinated and starting to feel comfortable with air travel again. TSA officers screened over 1.3 million passengers last Friday, marking the highest number of passengers in a single day since last March. While the major airline companies have all had a tough time dealing with the impacts of the pandemic, it seems possible that they are turning the corner. Given the renewed optimism surrounding the travel industry and airline traffic volumes, many of the airline stocks are rallying to levels not seen in over a year.
The important thing to note about airline stocks is that most of them are still trading well below their pre-pandemic price levels. That could mean that even more upside is in store for investors that are looking to book a ticket on the ride up. While there are plenty of challenges for these airline companies to overcome, the recent stimulus package and increasing volume of travelers are both signs that perhaps the worst is over. Fasten your seatbelts as we take a look at 3 airline stocks that are taking off.
Related: American Airlines Conducts First Public Boeing 737 Max Test Flight After Ban
One of the most important things to consider when you look at the airline stocks right now is whether or not you believe that global air travel will experience a permanent demand reduction, or if you believe that the reduction in volume is only temporary. If you find yourself falling under the latter camp, United Airlines is worth a look at this time. Back in 2019, before the pandemic, this company was operating more than 4,900 flights per day to 362 airports all over the world. It’s the most internationally oriented of all of the U.S. airline companies, which could be a good thing as countries around the world start to fully reopen their borders. The company is also partnered up with Chase for a frequent flier program, which might be a nice growth driver over the long term.
United has been forced to cut its operating costs considerably, given the dramatic reduction in passenger revenue last year. This is a good thing in our view, as it can help to minimize liquidity risk until things start to get back to normal and provide potential earnings surprises if air travel demand recovers quicker than anticipated. United Airlines saw its operating costs drop 42% year-over-year in Q4, thanks to workforce reductions and lower fuel consumption. While United Airlines will likely report losses for the majority of this year and has a lot of debt on its books, the thing to remember is that the company’s profitability could return sooner than you think given pent-up travel demand. The stock is up 46% year-to-date and has been one of the best performing airline stocks so far this year.
Next up is Delta Airlines, another major U.S. airline that was operating roughly 5,000 daily flights in more than 50 countries back in 2019. Perhaps the best-quality airline stock out there, Delta Airlines has already rebounded significantly off of its March lows and is up over 31% year-to-date. It’s important to remember that airline stocks can still expose investors to significant volatility, which means that owning the highest-quality names like Delta might be better for people who are willing to slightly limit their upside in exchange for a little less risk. Delta is a cut above many of the other airlines due to its strong financial position.
The company has one of the most conservative balance sheets and the highest operating cash flow per plane in the industry, both strong selling points to consider at this time. Delta is also poised to report positive free cash flow as early as the second half of 2021, which would be truly impressive given the current state of affairs in the airline industry. Many of the other airline companies are highly levered with aggressive purchase commitments that will probably keep them from reporting positive free cash flow for many years to come. Additionally, Delta recently announced that it has experienced a 30% daily net sales improvement over February as of March 15th. This is a good sign that leisure travel is coming back and bodes well for both Delta and the airline industry as a whole.
If you are finding it difficult to commit to a single airline stock, especially given the fact that they are all rallying at this time, perhaps the US Global Jets ETF is the right choice for you. This ETF tracks exchange-listed common stock of U.S. and international passenger airlines, aircraft manufacturers, airports, and terminal services companies. It’s a nice pick if you just want to gain exposure to the overall industry and can help you limit your risk exposure to any single company. With top holdings including American Airlines, Southwest Airlines, and Delta along with exposure to aerospace and defense company General Dynamics, this ETF is certainly an interesting option for investors to consider. The US Global Jets ETF is up over 33% year-to-date.