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Airline Stocks Fly High in Monday's Trading: Here's Why

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After being battered by the coronavirus-induced passenger revenue weakness in 2020, stocks in the airline space have been performing much better in the current year so far with an uptick in air-travel demand. However, the detection of the omicron variant of coronavirus, which was first identified in South Africa and subsequently spread to other countries, including the United States, threatened to reverse this upward movement. Consequently, the NYSE ARCA Airline Index had declined 6.5% on Nov 26, 2021 (the day the variant was declared to be one “of concern” by the World Health Organization) as a result of the rampant fears.

However, encouraging comments on the omicron variant of COVID-19 by Dr. Anthony Fauci, the president’s chief medical advisor, brought relief to the airlines. As evidence, stocks in the industry had a field day on Dec 6, 2021. Shares of industry heavyweights like American Airlines (AAL - Free Report) , United Airlines (UAL - Free Report) and Delta Air Lines (DAL - Free Report) gained 7.9%, 8.3% and 6%, respectively, on Dec 6 from Dec 3’s closing price. The NYSE ARCA Airline Index rose 5.8% on Dec 6.

Fauci’s Comments Boost Airlines

Airline stocks, which were sold off last week as news about the highly contagious omicron variant began to pour in, got a much-needed impetus from the comments of Fauci on Sunday. Fauci reportedly said that the early data on the new variant hinted at the fact that illness caused by omicron was not severe. He, however, cautioned that more information was required to fully understand the risk profile associated with omicron.

Airlines also received a boost yesterday from the fact that passengers passing through the Transportation Security Administration checkpoints fell only to 80-85% of the corresponding 2019 levels last week from the 90% levels touched during the Thanksgiving holidays. This better-than-expected performance with respect to air-travel demand is certainly an added positive and airlines would be hoping that Fauci’s words will help instill more confidence in passengers.

Upbeat Air-Travel Demand Likely to Continue

With the relaxation of restrictions following increased vaccination, air-travel demand has been picking up of late. Evidently, at the currently Zacks Rank #4 (Sell) Delta, passenger revenues increased 34.7% in the September quarter from the June quarter’s reported level. In second-quarter 2021, passenger revenues at DAL improved a massive 94%, sequentially. The presence of the winter holiday period is expected to further bolster DAL’s fourth-quarter passenger revenues.

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Delta transported 3.6 million passengers during the Thanksgiving holiday week (Nov 21-Nov 28) with a post-downturn record 534,000 passengers flying on DAL flights on Nov 28. The fact that the omicron variant is likely to cause only mild illness is expected to reinvigorate air-travel demand, which in turn, is expected to maintain (if not increase) the upward graph witnessed in DAL’s passenger revenues in the final quarter of 2021.

United Airlines, another big gainer on Dec 6 following positive updates on omicron, has also been benefiting from improved passenger revenues this year so far. Mirroring the uptick in air-travel demand, passenger revenues at UAL more than doubled in the June quarter from the March quarter’s reading. The sequential improvement continued in the September quarter as well. Passenger revenues in the December quarter are expected to sustain this positive momentum owing to the upswing in traffic during the holiday period.

The current positive news on omicron is likely to fuel top-line growth at United Airlines. Management at UAL already stated that its schedule to South Africa will not be changed. UAL and DAL are the only two U.S. carriers with non-stop services to South Africa. UAL’s CEO Scott Kirby is also bullish on the future of air-travel demand with omicron only believed to cause a short-term dip in demand. Kirby expects the impact of the omicron variant to be lesser on the airline industry than the delta variant.

American Airlines, shares of which gained 7.9% on Dec 6 following Fauci’s upbeat comments on the omicron variant, has also been witnessing an uptick in passenger revenues this year to date. At American Airlines, passenger revenues increased 21.6% in the September quarter from the June quarter’s reported level. In second-quarter 2021, passenger revenues at AAL soared in excess of 100%, sequentially. The presence of the winter holiday period is expected to further lift AAL’s fourth-quarter passenger revenues.

American Airlines reportedly flew 5.6 million passengers during the Nov 19-Nov 28 period. In a bid to meet the upsurge in demand during the Thanksgiving holiday period, AAL offered flight attendants up to triple pay for making trips on peak days during the period. The fact that the omicron variant is likely to cause only mild illness implies that passenger revenues at American Airlines are unlikely to be hit (if at all) unlike the delta strain. Hence here too, the recently witnessed growth in passenger revenues is likely to be preserved.

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