Airline stocks could climb 70% as the hard-hit sector recovers from the pandemic, Jefferies says

Flying on American Airlines during pandemic
Flying on American Airlines during the pandemic.

  • Airline stocks could advance by another 70% after their 30% rise so far in 2021, said analysts at Jefferies.
  • American Airlines was upgraded to a hold rating from underperform as part of a look at the sector.
  • Commodity inflation is something to watch as a pressure point for earnings but currently works as a “tailwind”.
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Airline stocks look set to fly up by another 70% as route changes, relatively lower oil prices and other structural considerations help guide the sector’s recovery from the coronavirus crisis, says Jefferies.

The financial services firm outlined its view on Tuesday in a note examining the implications of rising multiples after a collective 30% gain in shares of airlines in its coverage group. Airline shares have risen in recent months as part of a broader ramp-up in business activity spurred by COVID-19 vaccinations and fiscal stimulus that includes $1,400 checks now being sent to most Americans.

“The consensus view around air traffic is that 2023 looks very similar to 2019, with domestic fully recovered and international largely returning to pre-COVID levels,” the financial services firm wrote.

The S&P 500 Airline Index rose nearly 3% during Tuesday’s advancing about 31% this year. The US Global Jets ETF picked up 2.5% during the daily session and has picked up roughly 21% so far in 2021.

Considering factors including productivity improvements alongside a partial offset from net debt changes, “airlines currently trade at a 4.3 times multiple on the bull case scenario versus a historical average of 6X, implying ~70% potential upside across the group,” said Jefferies equity analysts led by Sheila Kahyaoglu.

Jefferies raised its price target on Delta Air Lines to $50 from $40, its target on Southwest Airlines to $70 from $55, and its target on United Airlines to $60 from $55.

Jefferies said commodity inflation is a “watch item” as a potential headwind to 2023 earnings for airlines, but that it’s currently a “tailwind” compared with 2019, before the pandemic emerged. “Despite the recent rise, the futures price for Brent delivery in Dec 2023 remains at ~$56, below Dec 2019 prices of ~$60” per barrel.

Jefferies’ examination included a rating upgrade for American Airlines stock to hold from underperform. It said American is best positioned to pass costs to consumers as the sole operator on 37% of its routes compared with 29% at Delta and 21% at United.

Meanwhile, American’s partnerships with JetBlue Airways and Alaska Air include a strategic exit from some less profitable routes in the Northeast and Northwest and the changes have the potential to drive total revenue up by 2.3% to $46.8 billion in 2023 from 2019.

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Oil tumbles 8% as uneven vaccine rollout threatens demand prospects

oil texas
Workers extracting oil from oil wells in the Permian Basin in Midland, Texas.

  • Brent and West Texas Intermediate oil futures each fell by 8% during Thursday’s session.
  • Rising COVID-19 cases in Europe are hurting demand prospects for oil.
  • A rise in the US dollar was also putting pressure on the commodity.
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Oil prices were sharply knocked down Thursday, hurt in part by a dimmer outlook from Europe as the region battles rising COVID-19 cases counts and a sluggish rollout of vaccinations to curb the spread of the disease.

Brent oil, the international benchmark, extended its run of losses into a fifth session and West Texas Intermediate crude was in its sixth consecutive session in the red.

“Europe is struggling with COVID. Their pickup in crude demand is likely to lag the Americas and it’s probably going to really threaten a lot of hopes that we were going to see a big pickup this summer,” Ed Moya, senior market analyst at Oanda, told Insider on Thursday.

Brent oil fell 8% to $62.52 barrel and WTI fell by 8.3% to $59.25 per barrel.

Several European countries were recording a rise in coronavirus infections, prompting France on Thursday to declare new lockdown measures in Paris while Italy this week imposed movement restrictions.

Oil prices found no relief Thursday from the European Medicines Agency’s ruling that AstraZeneca‘s coronavirus vaccine developed with Oxford University is safe to use. The review came after several European countries suspended the vaccine’s use following reports of blood clots in some people who had been injected with the formula.

Meanwhile, oil was under pressure in the wake of the Federal Reserve’s policy meeting on Wednesday during which it upgraded its growth projections for the US economy.

“You have a stronger dollar which has emerged from the surge in Treasury yields, which is also weighing on commodities as well,” said Moya. The US Dollar Index rose 0.5% to 91.87.

The 10-year Treasury note yield note yield surged past 1.7% on Thursday, marking a fresh 14-month high and the 30-year yield rose to 2.5% for the first time since August 2019. Higher yields tend to make the greenback more attractive to holders of other currencies.

While the outlook for European oil demand looks weakened by the COVID crisis, there are still expectations for stronger oil demand from the US with vaccinations on the rise, said Moya.

“It’s going to be a very busy summer travel season and I think jet fuel demand will also bounce back. We haven’t seen airlines really increase their flights…but once we start to see that, that’s going to be very positive for the demand forecast.”

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Oil surges 5% following reports OPEC+ will extend production cuts through April

oil texas
Workers extract oil from wells in the Permian Basin in Midland, Texas.

  • Oil prices surged by more than 5% after OPEC and its allies reportedly agreed to keep output levels steady. 
  • Saudi Arabia committed to sticking with a voluntary oil supply cut of 1 million barrels per day.
  • The supply decision by OPEC+ is “incredibly bullish” for the oil market, says one analyst.  
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Oil prices soared Thursday in the wake of reports that major oil producers have agreed to keep their supply cuts intact through next month.

OPEC and its allies had been discussing whether or not to restore as much as 1.5 million barrels a day of oil production. The group ultimately decided that it will leave output at current levels, according to a Bloomberg report

Saudi Arabia, meanwhile, committed to extend its voluntary cut of 1 million barrels of oil per day. The oil market officials meet via video-conference. The discussion took place at a time when recovery in the oil market is still taking hold after a plunge in demand because of the COVID-19 pandemic. 

Prices for Brent crude, the international benchmark, jumped as much as 5.3% to an intraday high of $67.47, with the gain later trimmed to 4.7%.

The decision by OPEC+ was “incredibly bullish,” and Saudi Arabia’s decision “was shocking as it leaves them vulnerable to losing market share next month when the oil market is in deficit by a couple million barrels,” said Edward Moya, senior market analyst at Oanda, in a note.

West Texas Intermediate oil futures also popped up as much as 5.3% to an intraday high of $64.51. The continuous contract was later up by 4.6%.

The Energy Select Sector SPDR exchange-traded fund climbed 3.8% and the United States Oil Fund, a popular oil ETF, moved up 6%.

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