Wrong Time to Buy Airline Stocks

Shares of major airline carriers are adding a few cents in Tuesday's pre-market after the U.S. Congress set aside $27 billion in relief funds for airlines and other transportation. However, these issues are still trading lower for the week after getting hit by the U.K. discovery of a virus mutation that triggered a wave of new travel restrictions. The whipsaw highlights major challenges that could keep these laggards stuck in the mud through most of 2021.

Key Takeaways

  • Major airline stocks are trading lower for the week, despite Congressional relief.
  • Industry revenues are unlikely to return to 2019 levels for several years, at a minimum. 
  • A return to March lows is now unlikely.
  • Sector stocks could become "zombies," grinding sideways on low volume in dead long-term patterns.

United Airlines Holdings, Inc. (UAL) sounded the alarm in November, reducing fourth quarter guidance after bookings fell and cancellations increased as a result of surging infections. The bearish call dampened sector sentiment that had improved steadily through the summer months as a result of stronger-than-expected travel. However, that mobility proved to be a false dawn, with the second wave and mutation fears now taking control of the tape.

While the capital infusion will slow the industry's "cash burn" rate, it won't do anything to stoke slumping demand. Ominously, Bill Gates recently warned that 50% of business travel will go away "permanently" as a result of the virtual meeting space, with 30% of employees working remotely on a long-term basis. If so, industry revenues will fail to return to 2019 levels after the pandemic runs its course, raising questions about "normal" valuation.

Wall Street consensus on major carriers is a mixed bag, with Delta Air Lines, Inc. (DAL) holding a relatively strong "Moderate Buy" rating while United has dropped to a "Hold" and laggard American Airlines Group Inc. (AAL) to a "Moderate Sell." In addition, no targets are forecasting 2019 price levels in 2021, exposing a bit of hypocrisy. Even so, the lowest lows of the pandemic were probably booked in March, with vaccines putting a multi-year floor under price action.

Valuation is the analytical process of determining the current (or projected) worth of an asset or a company. There are many techniques used for doing a valuation. An analyst placing a value on a company looks at the business's management, the composition of its capital structure, the prospect of future earnings, and the market value of its assets, among other metrics.

Chart showing the share price performance of the U.S. Global Jets ETF (JETS)

The U.S. Global Jets ETF (JETS) came public at $24.50 in April 2015 and ground sideways into a November 2016 breakout that posted an all-time high at $34.75 in January 2018. Price action broke down from a three-year topping pattern in February 2020, slicing through support and into March's all-time low at $11.25. A May support test ended just two cents above that level, giving way to a powerful short squeeze that stalled in June near the 50-week exponential moving average (EMA).

The fund carved higher lows in August and September, stoking a fourth quarter uptick that accelerated in November after Pfizer Inc. (PFE) announced positive vaccine results. It broke out above the 50-week EMA but, so far at least, remains stuck under even tougher resistance at the 200-week EMA. For investors, this is no man's land, marking a standoff between bulls and bears. That makes total sense, with full hospitals and a mutating virus competing for attention with two very effective vaccines.

A short squeeze occurs when a stock or other asset jumps sharply higher, forcing traders who had bet that its price would fall to buy it in order to forestall even greater losses. Their scramble to buy only adds to the upward pressure on the stock's price.

The Bottom Line

U.S. airline stocks are ticking higher after receiving Congressional relief, but industry revenues are unlikely to return to 2019 levels for several years, raising doubts about upside potential. Given bearish long-term catalysts, these issues could drop into multi-year trading ranges well below prior highs.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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