Budget Airline Shares Remain a Volatile Trade

The COVID-19 pandemic has hit the travel industry hard, with the effects being felt heavily on airlines. Major airports are turning into airplane parking lots rather than international travel hubs, and air travel has been down to 60% since the beginning of the pandemic. Due to the worldwide lockdown measures, both leisure and business travel have dropped to levels that are almost non-existent compared to “normal” times.

The biggest issue for airlines is that it is hard to cut back costs. Airplanes that do not fly still cost money since workforce redeployment is not a viable option. Also, if flights take off with just a few guests, that’s usually bad business for the airline since the fuel costs will likely exceed ticket sales. 

Low-cost Carrier Stocks Have Recovered Some of Their Losses

Fortunately, airline investors have started to become more hopeful about the future. Like other industries, airlines have also felt the onset of a slight recovery. Domestic carriers have benefitted from increased domestic travel, particularly low-cost carriers, because consumers have become more price-sensitive lately.

Spirit Airlines, the leading US low-cost carrier, has seen a slight recovery in its share price since the beginning of the lockdown in March. “Obviously, if we see heightened travel restrictions or other disruptions, it could change this outlook,” said Matt Klein, Spirit’s chief commercial officer. “We are not seeing anything in our bookings to suggest this is going to happen, but we are mindful that the recovery may still be a little bit bumpy, and there will be some noise while demand recovers to pre-COVID levels.”

Shares of Allegiant Travel Company, the parent of Allegiant Air, have also fully recovered and now trades above pre-pandemic levels. “We are flirting with cash-flow break-even,” stated Allegiant CFO Gregory Anderson in an earnings call last quarter. “While the environment remains fluid and bookings will certainly ebb and flow, our data suggest these average booking levels are sustainable moving forward.” 

Airline Stocks Remain Highly Vulnerable to Lockdown Measures

However, airline and travel stocks have taken another hit in 2021 due to the US deciding to extend travel restrictions and UK ministers enforcing harsher lockdown measures. 

The latter has hit predominantly European carriers. Budget carriers Ryanair and Easyjet were both down 4.6 and 7.6% respectively, Wizz Air dropped 5.4%, and Jet2 lost 13.6%. According to CMC Markets analyst David Madden, “It is understood the government is divided over what new measures should be implemented but nonetheless, traders are cutting their exposure to the travel sector.” 

The up and downs of recent months portray just how vulnerable the sector is to the pandemic, lockdown measures, and political announcements. Until vaccinations can help create a more stable environment for travel, airline stocks will remain volatile. 

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