May 04, 2022
Travel and leisure is a big business. It also happens to be one that has been battered by the global COVID-19 pandemic. In 2019, the global airline industry reported $838 billion in revenue. As the global economy came to a standstill and people were ordered to stay at home, those revenues plummeted to a fraction of its former greatness. At one point in the crisis, as few as 80,000 passengers were making their way through airports in the United States per day. All wounds heal with time: COVID is far from over, but the public is starting to get vaccinated and travel once again.
This is supported by the TSA’s travel throughput, which shows that the number of passengers flying in the United States is rising once again. It has not gotten back to pre-pandemic levels, but the number of travelers is nearly 10x higher than this time last year as the pandemic reverberated throughout the world. And, given the fact that Americans have been homestuck and working from inside for over a year, this likely means a boom for airline and battered leisure stocks.
So, how do you capitalize on the return to normal? Here are some thoughts:
Breaking down the state of the airline industry in 2021
As of May 5, 2021, the biggest airlines in the U.S market are Southwest Airlines, Delta Airlines, United Airlines, and American Airlines. These are probably familiar names for travelers for one simple reason: these airlines represent more than two-thirds market share of passenger miles in the U.S. and comprise a total of $98.2 billion in market capitalization. They are behemoths in both reach and financial presence.
Below the “Big Four” are a number of growing, mid-sized carriers. Among them are a number of carriers that might be familiar to frequent fliers. This category includes Alaska, JetBlue, and Spirit. These carriers comprise a meaningful, albeit smaller, 16.1% of the revenue passenger miles from February 2019 to January 2020. They also make up $18.2 billion in market cap.
In addition to the Big Four and mid-sized carriers are a number of up-and-coming carriers. Among them are companies such as Frontier Airlines, Skywest, Allegiant, Sun Country, Hawaiian Airlines, and dozens of others. COVID has created demand for these airlines in markets, prompting several to go public to raise money for expansion and growth. In March 2021, Sun Country and Frontier raised millions through their own IPOs. Many of these regional, budget carriers are still making strides in the market. Some, such as Frontier, are taking on hundreds of new planes to accommodate demand and plans for growth.
In many ways, the COVID pandemic pressed “reset” on the airline industry. And, with that reset has come a shakeup of the broader airline industry—one which is ongoing throughout COVID. With many airlines adding more nonstop routes to more travel destinations and cities, in order to accommodate the perceived demand for travel, some airlines might grow and become leaders in certain regions or parts of the country. This might make individual carriers attractive investments, if you’re willing to do the due diligence to identify fast-growing airlines with ambitious growth and expansion plans. However, rather than buying a random combination of airlines such as $LUV and $ULCC, you might want to buy a fund tracking them all.
What is the best way to invest in airline stocks in a post-COVID recovery?
The airline industry still has a long way to go before it is back to its pre-COVID growth and success. That said, much of the industry has already recuperated most of its losses from the COVID crash. The best way to measure the success of U.S airline stocks is in the U.S Global Jets ETF, the only exchange-traded fund tracking the U.S. airline market. As the COVID crash consumed markets, the $JETS ETF was one of the most battered funds: it fell over 59% in one month. Since then, it has been clawing back those losses. As of May 2021, it still trades 17.9% below where it traded in the first week of 2020.
Some investors saw the 59% drop as a discount, prompting investors to hop in. In a similar sense, some investors will see the 17.9% difference between the current price of $JETS and its price at the start of 2020 as a discount. However, whether the risk-reward is worth it to you is ultimately a matter of your personal beliefs.
Since $JETS holds nearly all of the aforementioned airlines, and weighs those carriers according to their market capitalization, it might be an acceptable way to ride the travel resurgence. Regardless, airlines will have to fill seats again in order to float the lofty valuations that investors have already priced in.
If you’re looking for an investment opportunity that is not as industry-specific or narrow as airlines, you might look into a broader alternative: investing in a high beta strategy. High beta strategies invest in stocks that have seen above-average volatility–when applied to the COVID situation, this ultimately means investing in stocks that were battered by the pandemic and have not recovered. Right now, that means that a high beta strategy like $SPHB counts cruise companies, financial firms, fashion brands, and leisure brands among their ranks. However, exercise caution: just because battered brands have dropped does not mean that they will recover. Some companies will not be better off after COVID, and some might not exist at all.