Why airline stocks are volatile today

What happened

The pandemic continues to grab the headlines and investors are struggling to know what to do with it. On a day when cases rose across the UK and European countries relaunch lockdowns, airline stocks were everywhere, with Spirit Airlines (NYSE: SAVE) and Azul (NYSE: AZUL) both fell more than 5% on Monday as American Airlines Group (NASDAQ: AAL) at one point was up 4.9%.

So what

It has been two long years for airline stocks. The early days of the pandemic virtually wiped out travel demand, leaving much of the global industry to scramble to pay its bills, and although demand has slowly returned, airline balance sheets remain fragile. The last thing the industry needs is a return to the lockdowns and travel restrictions that marked the early stages of the pandemic, but the new omicron variant threatens to do just that.

Image source: Getty Images.

Over the weekend, Israel added the United States to a list of banned destinations due to high pandemic cases, and the Netherlands returned to a state of lockdown. Germany and France are weighing new restrictions and in the UK new cases are on the rise.

So far, US President Joe Biden has resisted calls for further lockdowns, encouraging vaccinations instead. But if we’ve learned anything over the past two years, it’s that the pandemic is hard to predict, and investors slumped stocks on Monday morning fearing the situation would get worse before it got better.

Spirit is a low-cost discounter seen as a good bet to recover first, assuming a resurgence in demand is led by cost-conscious tourists, not business travelers. Azul, meanwhile, is under pressure as his home country, Brazil, has been particularly affected by the pandemic. Although Azul is one of the healthiest carriers in its home region, airlines in Latin America are more reliant on international travel than their US counterparts, meaning further closures could hit it particularly hard. .

The US is the outlier, although the company lost more than 2% in the pre-market hours and started the day in the red. It is possible that the stock is going up because the short sellers, those who bet that a stock is going down, take their winnings and hedge. At the end of November, American was the most short-circuited airline stock, according to Cowen, with about 15% of its shares sold short. The stock was up Monday on unusually high volume.

Now what

At the very least, omicron is a reminder of how little we know about how the coming months will unfold. But it seems clear that vaccines won’t get us out of this predicament quickly and that COVID will stay with us in one form or another until 2022.

It will be difficult for the airline industry to fully recover until the threat of lockdowns and restrictions is behind us. And until that time comes, investors should expect continued volatility and stocks going up and down based on the latest headlines. For those with a long enough time horizon, there is reason to be optimistic about the return of travel, but little reason to believe it will happen anytime soon.

Of these three stocks, Azul appears to be the most intriguing long-term option due to its powerful position in Brazil. But Brazil could also take longer to normalize than the US market, which means there is still plenty of time to be sidelined. As Monday’s trading shows, airline stocks are likely to fluctuate a lot in the coming months without actually going anywhere.

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Lou Whiteman is the owner of Spirit Airlines. The Motley Fool owns and recommends Spirit Airlines. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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