Reopening stocks from airlines to cruise operators are getting hammered as Delta strain drives surge of infections

airport coronavirus
Airline stocks struggle Monday.

  • Shares of cruise operators and airlines were hit Monday as COVID-19 infections ramp up worldwide.
  • Carnival, American Airlines and Expedia were among the stocks that slumped on worries of new virus infections.
  • The CDC on Monday warned travelers to avoid going to the UK because of rising infections.
  • See more stories on Insider’s business page.

Shares of airlines, cruise operators and other travel companies slumped Monday during a selloff set off in part on mounting cases of COVID-19 infections worldwide, highlighting concerns about recovery in the industry and in the global economy.

American Airlines lost 4.4% and cruise operator Carnival fell 5.4% as part of a broader slide in US stocks that saw the Dow Jones Industrial Average plunge by more than 900 points during the session. On the Dow, airplane maker Boeing moved 5% lower.

Expedia Group, the online travel bookings site which also runs Hotels.com and Trivago, gave up 2.5% and hotel chain Marriott declined 3%.

Meanwhile, Carnival, Norwegian Cruise Line Holdings fell 6% and Royal Caribbean Cruises lost 4.6% after a US appeals court ruled late Saturday that cruise restrictions put in place during the pandemic could continue in Florida, according to the Associated Press.

Travel stocks were hit as countries worldwide report rising infections of coronavirus from the Delta variant, which health experts say is the most transmissible strain yet. Infections in the US were rising in all 50 states, with Los Angeles County, the largest in the country, reimposing indoor mask mandates. Delta Air Lines declined 3.7% and Southwest Airlines gave up 2.5%, weighing on the US Global Jets ETF which fell 3.9%. COVID-19 cases have surpassed 190 million.

The headwinds battering travel stocks also helped drive a plunge in oil prices, which are being hit with supply and demand concerns as OPEC+ over the weekend agreed to boost crude output.

“Jet fuel demand will struggle as international travel is not happening anytime soon, especially given how several Americans are struggling to get their passports renewed even with expedited services. Even domestic travel to Hawaii is losing appeal given the limited availability for car rentals, lack of hospitality workers, and extreme price hikes for lodging and dining,” said Ed Moya, senior market analyst at Oanda, in a note.

On Monday, the US Centers for Disease Control and Prevention advised Americans against traveling to the UK because of the spread of COVID-19 in the country.

The UK recorded more than 50,000 new cases for the first time in six months on Friday. Travel stocks there on Monday dropped after the UK government said fully vaccinated travelers entering from France must still quarantine, a move made as French cases increase. France on Sunday posted a third day of more than 10,000 new infections.

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Bank of America upgrades airline stocks on stock-market momentum, but warns the industry is still vulnerable with valuations above pre-pandemic levels

American Airlines and United Airlines at LAX
American Airlines and United Airlines planes at Los Angeles International Airport.


Airline stocks have upside ahead, but investors should be warned that the industry is still vulnerable with many valuations above pre-pandemic levels, according to Bank of America. 

In a Monday note, BofA research analyst Andrew G. Didora raised price targets for airline stocks by an average of 15%, but emphasized that momentum, not value, is driving the higher price targets.

Didora raised JetBlue‘s target from $16.5 to $19.5, citing lower fuel prices, lower competitive supply, and a strong leisure-oriented user base. Didora also raised Alaska Air Group from $60 to $72, which implies a 16% increase from Friday’s close, citing the airline’s “solid liquidity position relative to peers.” 

The analyst sees the stocks, among other names, trading higher on stock market momentum in the near-term as investors load up on industries they expect will bounce back as the pandemic eases. However, Didora emphasized that this is a “buyer beware” situation, as valuations may be getting ahead of fundamentals.

“While airline stocks have traded on a re-opening since last fall, momentum continues to drive the stocks near term, leading us to increase our price objectives. But buyer beware, as we see risks to fundamentals in a recovery at a time when most airlines have enterprise values higher than pre-pandemic,” Didora said.

“As the market bids up airline stocks into a demand recovery, we see risks unfolding that lead us to believe profits will trail revenues and revenues will trail demand,” he added.

High jet-fuel prices and low demand remains an earnings risk, Didora said. Also, airline bookings remain relatively quiet; sales decreased 81% year over year for the week ending February 14.

The analyst holds a buy rating for Air Canada, Alaska Air Group, JetBlue Airways, Mesa Air Group, and Southwest. He also holds an underperform rating for American Airlines, Hawaiian Holdings, Royal Caribbean, and United Airlines.

Bank of America airlines
Bank of America

 

 

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