Is the commercial air travel industry about to take off?

Commercial air travel can recover as we exit the pandemic and as consumers begin allocating savings towards post-covid vacations. We wonder—is the recovery already priced into air travel stocks, or is there more upside than meets the eye?

State of the commercial aviation industry

The hinge point underlying the discussion around air travel stocks is ultimately between changing consumer preferences, and the cyclicality of the air travel industry. Both are hard to gauge right now because regulations may slow down consumer desires to travel, and re-opening projections remain unclear considering uneven vaccines rollouts, interest rates, and bruised supply chains.

Nevertheless, there are signs that commercial air travel is on an upward trajectory. In parallel, there are also lots of c-suite discussions around the value add of sending employees abroad for business which means business travel might be less predominant for the industry’s future. This is a problem because 75% of airline profits come from business travelers (who only represent about 12% of travelers).

During the pre-covid world, the air travel industry was very profitable. In February 2020 for example, Delta made so much money that it paid out $1.6B in profit-sharing bonuses to employees. Times were good and nobody expected the lockdowns. In a matter of months, airlines lost years of gains and posted large losses. However now, Delta and American shares are down no more than 13% from last January and Southwest is up more than 13%.

The question then becomes: is the recovery priced in already?


Key performance indicators and projections

Bank of America polled Transportation Security Administration (TSA) data, and found that air travel is closing in on 1.4 million travelers per day, a figure slightly improved from same time last year, but well below the 2.3 million daily travelers seen same time in 2019. In other words, there is a clear upward trajectory which is a good sign, but it is still not enough to claim victory. There is more room to grow which is exciting as revenues could see a steady rise over the next quarters. Some analysts however believe that 2019 passenger figures will not be replicated until at least 2023.

Figure 1: Air travel travelers comparison between 2019-2021


There is clearly momentum in air travel stock performances now that vaccines are rolling out as shown in the next figure, especially as lockdowns near their end—some firms involved in the air travel industry are showing runs of form with Bombardier up 77%, AerCap up 30% and Boeing up 14% so far this year.

Fuel demand, both for motor gasoline and jet fuel, is still running below its historic norms, but has risen slightly from their March 2020 lows. Labor markets are starting to improve with less jobless claims each month, and while small businesses are posed for yet more difficulties going into 2021, the air travel industry could gain from spring and summer seasonality demand surges. Because the air travel industry is cyclical in nature, a boom in economic recovery could equal a boom for the stocks in the industry.

However, global airline capacity remains down 40% relative to January 2020 levels and carriers likeNorwegian Air Shuttle remain in administration with rumors that startups like Avelo Airlines and Breeze Airways could snatch their spots. This is to say that traditional airline companies who saw a decade long profit wave will be met with even more competition than before as new entries attempt to stab at the pie in 2021.

Figure 2: YTD Performance by sector


Expedia, an online travel and leisure booking tech group, came out with a 2021 projections report showing some interesting consumer trends. In summary, consumers are eager to hit the skies, after the pandemic. The lockdowns have enabled people to save an average $3,444 for their next trip, and 44% say they will book more than one trip in 2021. Consumers have shown optimism related to covid vaccinations and Q3 2021 is predicted to see a surge in leisure travel.

Bain & Company came out with their own projections mid-March shown in the figure below, expecting revenues to be about half of 2019’s. Bain highlights some key hurdles for the industry in 2021 including; an uneven pace of vaccination, slow development of health travel documentation, and intensifying rates of international border closures. On the other hand, with more people vaccinated than ever before, they suggest an industry recovery is only likely for the fourth quarter of… 2023.

Figure 3: Bain projections of air travel demand

How to play it...

There are many pulls and pushes seemingly at play for commercial air travel this year; more vaccines, more mobility and increased demand for air travel is great, but if fuel costs rise, and more competition takes a hold of the industry, stock earnings could suffer (though consumers would be happy because lower prices are nice on the wallet).

It would be very surprising however, to see earnings fall further below covid-era levels. It is unknown how quickly revenues will rise, if profitability will reach higher grounds any time soon, or when public health officials will indicate whether or not it is safe to go to Hawaii for Spring Break.

Airbus and Boeing...

Airbus and Boeing are the world’s top aero companies. They exist and fight for market share all the time, and are correlated stocks. They make engines and key parts for planes and are essential to the air travel ecosystem. Assuming air travel improves, demand for their goods and services will rise thus pushing up earnings and future share prices. Both stocks have risen YTD as shown below. They still have room to grow to reach their pre-pandemic share price levels, leaving them both in a position for more upside to come.

Figure 4: Boeing versus Airbus stock price performance

American Airline Companies...

80% of the US aviation market is dominated by four companies, Delta, American, United, and Southwest (not to mention JetBlue). Currently, the situation with covid continues to muddle the outlook for these players but they have shown flexibility through recent rebounds. Airlines are currently attempting to maintain cash-burn rates low, and say such rates are high not because of badly run operations but simply because of externalities related to covid (that is what airlines CFOs suggest).

Figure 5: Big four airlines stock price performance

Complementary goods: think Expedia, Airbnb, Bookings...

Other stocks to think about are complimentary stocks that indirectly benefit from air travel doing well. What do people do when they travel? They book flights, and look for places to spend the night. Expedia, Booking Holdings, and Airbnb fit the bill and see other tailwinds from a potential reopening.

Figure 6: Expedia, Airbnb and Booking Holdings share prices could benefit from air travel resurgence.

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