With travel restrictions easing, airlines are offering their own upbeat assessment for busier skies, including the belief that the number of passengers in 2022 could exceed levels last seen in 2019.Nathan Denette/The Canadian Press
Airlines are back in favour with investors. This latest rally could be the one that sticks.
Air Canada’s share price has soared nearly 19 per cent since late October, and it’s not alone at this altitude. Among U.S. carriers, United Airlines Holdings Inc. is up 15 per cent and Delta Air Lines Inc. is up 14 per cent over the same period.
The gains mark the latest move in zig-zagging action in 2021 that has likely made investors wonder whether the turbulence is just part of a jumpy long-term recovery for the sector or a sign that they should cash in their gains when the going is good.
The stocks took off early in the year in anticipation of vaccines ending the pandemic and restoring travel activities to levels that resembled 2019, when planes last crisscrossed the skies unhindered by COVID-19.
But the airline rally faded in June, when optimism about the pandemic met a fourth wave of outbreaks driven by the highly transmissible Delta variant and continuing work-from-home regimes that left no room for business travel.
What’s different this time?
For starters, there are promising signs that the worst of the pandemic is over. Outbreaks have subsided in much of the world, including Canada and the United States. That’s raising expectations that offices will welcome back employees and, presumably, send them on business trips.
WestJet suspends nearly 300 employees not fully vaccinated for COVID-19
Travel restrictions are easing. Earlier this week, the United States lifted an 18-month travel ban for fully vaccinated foreigners from dozens of countries, marking a significant step toward normalizing flights.
Airlines are offering their own upbeat assessment for busier skies, including the belief that the number of passengers in 2022 could exceed levels last seen in 2019.
When United Airlines reported its third-quarter financial results on Oct. 19, it said that capacity was 28 per cent below the third quarter of 2019. However, the airline expects that this deficit will narrow in the fourth quarter – and that capacity in 2022 will rise 5 per cent above 2019 levels.
To be sure, it can be hard to spot this level of optimism closer to the ground. Talk to someone at a travel agency that offers corporate travel services and they may reflect a harsher reality.
“It’s not booming, I’ll tell you that,” said Roz Collis, corporate account manager at YYZ Travel Group, an agency based in Thornhill, Ont.
While interest in leisure travel has taken off recently, Ms. Collis so far has seen little increase in business travel, the source of fatter margins for airlines.
What’s more, airline stocks continue to attract short-sellers, who bet against stocks and profit when share prices decline. Air Canada shares were the most heavily shorted among Canadian companies as of Oct. 25, according to S3 Partners, with a whopping 27.2 per cent of the airline’s share float sold short.
In other words, the bet that airlines will enjoy an unprecedented rebound over the next year has some doubters.
“We are now dialling back the time frame we have assumed for full recovery,” RBC Dominion Securities analyst Walter Spracklin said in a research note last week, after Air Canada reported its third-quarter results. That, he estimates, won’t arrive until the second half of 2023.
But there’s good news here for investors with relatively long time-horizons: Perhaps share prices aren’t yet priced to perfection (read: 2019), which could allow shareholders to ride out any setbacks and make further gains as visibility improves.
If the airline rally early this year was in anticipation of a quick return to normal, this one may rest on far more realistic assumptions, giving it some staying power.
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