Airline stocks: taking flight, despite Omicron turbulence

Buckle up and put away your tray tables: US airline stocks are poised for take-off in 2022.

The industry endured a rough fourth quarter. Hopes for a recovery and the return of lucrative international travel were upended in the final weeks of the year. Bad weather and airline staffing shortages — fuelled by the spike in Omicron Covid-19 cases — forced airlines to cancel tens of thousands of flights.

Delta Air Lines, the first of the big airlines to release its results, revealed the extent of the damage on Thursday. The company lost $408m in the final three months of 2021 amid a 29 per cent decline in passenger revenue. The weakness, which followed two profitable quarters, has carried over to the new year. Delta said it expected to lose money again in the first quarter.

Yet there are reasons to think the worst could be over. Omicron infections are expected to peak in the coming weeks. January and the first half of February are slow months for leisure travel anyway. Bookings should rebound by the time spring break arrives. Delta for its part says it ​​expects the final three quarters of this year to be profitable and to generate “a meaningful profit in 2022.” 

While the NYSE Arca Airline index has more than doubled from its 2020 low, it remains a fifth lower than its pre-pandemic level. The index has fallen 12 per cent since October.

This makes it a good time to check-in the sector again. Compared to a year ago, 62 per cent of Americans are now fully vaccinated. International borders have reopened and even business travellers are gradually starting to take to the skies again.

Pent up demand for travel means carriers should benefit from better pricing power. This should help offset the hit from higher fuel prices.

The recent history of investing in airlines has been volatile. But carriers have emerged from the crisis with leaner operations. Investors should begin to price in brighter skies.