Will aviation stocks take to the skies again in 2022?

The green shoots of recovery had been sprouting among aviation stocks in recent weeks as border restrictions were lifted and international air travel resumed, only to be hampered by the emergence of the omicron variant. It sparked an Africa-wide travel ban that could stall this recovery. Yet, signals seem mixed and the setback may be short as reports emerge that the new variant is not as lethal as its parent.

The Lufthansa [LHA.DE] share price dropped 0.5% between 24 November, when the World Health Organisation first flagged omicron and 6 December’s close. Delta Air Lines [DAL] share price dropped 2.3%, United Airlines [UAL] has fallen 6% and American Airlines [AAL] has dropped 8%, after a sharp fall in the last week, but has seen marginal recover since.

Omicron is believed to be more transmissible than previous COVID variants. The bigger concern among the markets, however, is that the variant appears to evade vaccines and cause serious illness. More data is needed, yet it could be weeks or even months before scientists have enough information to determine a course of action. Indications change by the day, as on Tuesday one pharmaceutical company said its antiviral pills were effective against omicron.

“Markets are clearly speculating that a rapid spread of a more brutal COVID strain could once again derail the global economy,” AJ Bell equity analyst Russ Mould is quoted as saying by The Guardian.

“Markets are clearly speculating that a rapid spread of a more brutal COVID strain could once again derail the global economy” - AJ Bell equity analyst Russ Mould

 

 

Will international travel shut down?

How low aviation stocks plummet will depend on what the eventual data shows. If vaccines can protect from serious illness caused by the variant, then disruption to travel would probably be minimised. However, if vaccines need to be tweaked in order to provide protection then more borders could close. This would potentially be problematic for carriers whose revenue is largely dependent on international travel and long-haul flights.

At the end of November, both Delta Air Lines and United Airlines – the only two US carriers with direct flights to South Africa – said they wouldn’t be altering their schedules, according to a Reuters report.

Speaking at the 2021 Airline Passenger Experience Association Expo, United Airlines boss Scott Kirby said “the recovery from Covid was never going to be a straight line.” Omicron should prove to be a near-term deviation and the recovery will continue “to trend in the right direction”, Kirby added.

 “My guess is, much like Delta [variant], it will cause a short-term decline in demand. But the trough will be at a higher level than the trough was after Delta. And the next peak will again be higher. And, we’re going to continue this way,” explained the executive.

As it stands, United Airlines is planning to resume daily non-stop flights between London and the US in March 2022, as well as other European destinations, including Edinburgh.

“Our bookings for Europe, from sort of mid-October through middle of last week, were at the same level or higher than they were for 2019 bookings,” Kirby said at the expo.

“Business demand was still down a lot, but it had recovered to a level that was better than even domestic business demand, almost overnight, which just shows you the pent-up demand, the desire to reconnect with people.”

Omicron could end up pushing back the resumption of transatlantic flights and cloud the outlook for carriers further.

 

How do analysts view airline stocks?

Nevertheless, Cowen analyst Helane Becker is bullish on the long-term potential of several aviation stocks. At the end of October, Cowen reiterated a ‘buy’ rating for United Airlines and raised the price target from $72 to $78.

“In the past year, each new variant has brought a decline in bookings, but then an increase once the surge dissipates. We expect the same pattern to emerge, although we don't expect each successive dip to be shorter than the prior one as people begin to accept that we will have to learn to live with this indefinitely” - Cowen analyst Helane Becker

 

In a note to clients reported by Yahoo Finance, Becker said: “In the past year, each new variant has brought a decline in bookings, but then an increase once the surge dissipates. We expect the same pattern to emerge, although we don't expect each successive dip to be shorter than the prior one as people begin to accept that we will have to learn to live with this indefinitely."

Becker expects to see dips in travel demand over the next few months but predicts year-over-year growth for the aviation industry in 2022, especially in international travel next summer.