Is Now a Good Time to Buy Airline Stocks?

Now that we have two very effective coronavirus vaccines heading for the market, things appear to be looking up for the airlines.

Airline stocks have rebounded sharply in the last few weeks as it increasingly looks like we will be able to put the pandemic behind us next year. United Airlines Holdings Inc. (NYSE: UAL), for example, is up 20% since the start of November.

And if UAL rebounds to its January highs, investors could make over 100% profits.

That profit potential has investors asking the same question: "Is now the time to buy airline stocks?"

The answer is yes.

And no.

Let us explain...

Buy the Ticket, Take the Ride

If you are a momentum-based investor who pays a lot of attention to your stock portfolio, some airlines look like a good trade here. They have momentum and could power their way higher over the short to intermediate term.

Southwest Airlines Co. (NYSE: LUV) shares have now risen more than 60% in the past few months. The stock price is now back above the 200-day moving average, which often indicates that a new bullish move for the stock is underway.

The 20- and 50-day moving averages have both crossed over the 200-day as well. They have both also turned up and now have an upward slope, which is considered very bullish.

Traders have an opportunity to ride this trend to a quick payday.

JetBlue Airways Corp. (NASDAQ: JBLU) is another airline that is up an impressive 60% plus in the last six months. The stock has almost precisely the same set-up as Southwest. Both the 20- and 50-day moving average have an upward slope since the breakout above the 200-day, and that is an indication the stock could keep moving higher.

The charts of the legacy airlines like American Airlines Group Inc. (NYSE: AAL), Delta Air Lines Inc. (NYSE: DAL), and United Airlines Holdings Inc. (NYSE: UAL) are nowhere near as bullish as Southwest and JetBlue, so I would pass on them even as a trade for now.

American Airlines has traded sideways for the last month and is just about where it was on Oct. 21. That's not a bullish sign for traders.

Use a tight stop on both airline trades. Airline stocks can be very noise- and news-driven, and any hint of bad news could reverse the recent gains very quickly.

There is a chance that the virus could deliver rally-ending noise before the vaccine is fully distributed.

Now, let's look at the long-term case for owning airlines stocks...

Why Airline Stocks Are a Profit Mirage

If you are a less active investor who takes a long-term view of their portfolio, airlines are probably best avoided for now. While they do have some price momentum, for now, the truth is that even with a vaccine being approved, business and leisure travel will still be subdued for some time.

The IATA predicts air travel won't recover until 2024, and that's if it ever returns to normal. Think about how many businesses have switched to remote work and cut the need for teams to jet around the country.

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A sharp rise in COVID-19 cases could see further restrictions imposed on travel this winter too. In all likelihood it will be late spring to early summer before everyone has the opportunity to receive a vaccine.

People's perception of flying has changed thanks to the pandemic, and it will take some time for everyone to get used to a new normal and resume traveling.

The legacy airlines, American, Delta, and United, are best avoided in any time frame. They were poorly run businesses before the pandemic. They still are, and I do not expect that to change after this is all over. All three are expected to post losses again next year.

The airline industry has taken on a lot of debt this year, and the interest payments will weigh on earnings for a long time. Airlines do not generate free cash at levels high enough to pay down the debt in any reasonable time frame.

After years of using free cash flow to buy back stock, some airlines have had to issue new shares in addition to debt to stay in business. After the optics of using all free cash flow to buy back stock for years and then requiring a taxpayer-funded bailout, it will be a generation or so before any significant airline will be able to buy back shares to support the stock price.

Southwest is the best in class airline, and even it will not see business get back to 2019 levels in 2021. The most optimistic estimates I have seen for Southwest assume that it gets back to 85% of 2019 capacity levels next year and fully recovers in 2022, assuming all goes as hoped with vaccine distribution.

The highest earnings estimate is for Southwest to earn about half of what the airline did in 2019. Most estimates are for far less than half.

JetBlue is projected to lose money again next year and should reach profitability in 2022. There is no practical case that can be made for stock trading back up to pre-COVID levels and staying there for any length of time.

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