The S&P 500 index is reaching new highs, with the majority of stocks looking overvalued. However, airline stocks are still inexpensive and have not kept pace with the index after sustaining a tumultuous 2020. But have the circumstances changed for the airline industry to witness a turnaround in 2021? We will discuss the crucial factors that can shape the future of the airline industry in 2021 and recommend the best picks in the industry in such a scenario.
The demand for air travel, although, has rebounded a little, but it will take years to reach the pre-pandemic levels. Many U.S carriers were on the brink of default, with revenues dropping by more than 50%, but were rescued by the $100 billion government's support package. Analysts believe that even if the pandemic situation improves drastically, airlines will take many years to recover from their burgeoning debt levels, high operating costs, and other adverse effects of the pandemic.
While the pandemic affected all airlines, some airlines may recover quicker than the others, depending on their strong and weak points. As per recent reports, Southwest Airlines has been aggressively expanding its fleet to increase its market share. In the race to recovery from the pandemic, Spirit Airlines is another strong contender, thanks to its low-cost and optimized route structure that is among the lowest in the industry.
Among United, Delta, and American, United Airlines stands ahead due to its route structure and network favoring the international and business segment. Delta's strong point is its workforce without union and its promising pre-pandemic performance. American, on the other hand, is reeling from the high debt accumulation and operational inefficiencies, particularly the high cash burn problems.
The forecast from International Air Transport Association (IATA) and airplane manufacturer Boeing shows that the number of air travelers will increase in the decade, with more people relying on air travel. So, it is a matter of time before we start to witness the air travel market expanding, reaching new levels. However, at the moment, airlines with strong fundamentals and competitive advantages are expected to outperform other industry players. Based on our analysis, we expect Southwest Airlines, United Airlines, and Delta Airlines to recover from the pandemic slump quicker than the other players in the industry. In the long-run, the industry is poised for growth, but the uptick in recovery is going to be gradual starting this year as we see the pandemic easing out with the coronavirus protection vaccine being administered to the public in various parts of the world. So, the negative effects have already been priced in and we might see the airline stocks showing recovery, with Delta, Southwest, United, and Spirit Airlines leading the recovery.
Disclaimer: I have no positions in any of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. All information should be independently verified and should not be relied upon for purposes of transacting securities or other investments. See terms for more info.