Airline stocks suffered major declines after their initial rally following the Covid-19 struggles. The long-term prospects of investing in the industry are uncertain.
What Are the Long-term Prospects for the Airline Industry?
You need a deep understanding of the market situation to make professional stock trading moves. Thus, it is important to study the journey taken by various stocks and industries.
The airline sector, which was among the industries worst affected by Covid-19, has now seen a massive rally. Most people are expecting the rally to continue and are looking to invest. Like some retail investors, who believe air travel demand is going to come back in a massive way. While others aren’t as optimistic believing that the rally for the airline sector could end soon.
Airline Stocks Suffer After Big Rallies
On Tuesday, June 9, many of the stocks got hit hard despite their previous stellar performances. With airline stocks being among those that had significant declines, many industry observers believe that air carriers could struggle to make any progress.
The greatest losses were experienced by American Airlines Group ($AAL) at 9%, Delta Air Lines ($DAL), and United Airlines Holdings ($UAL) at 8% and Southwest Airlines ($LUV) at 6%. Much smaller carriers such as Spirit Airlines ($SAVE) suffered a drop of 11%. But the losses were felt for the whole industry, with declines in the region of 7% to 9%.
Shares Could Rebound
Putting this into perspective, Tuesday’s declines seem significant considering the massive losses that airline stocks have had lately. Despite the decline, there is an increasing number of people traveling by air. As a result, airline companies are able to expand their schedules and provide more flights. There are also indications that future demand would rise. So, Airline Stockholders believe that shares will rebound in the long run.
Long-term Prospects Are Uncertain
Still, Tuesday’s declines were a reality check for airlines. Though there are more and more travelers, it still isn’t going to get as busy as things were before Covid-19. And it could stay that way for quite some time, according to analysts who feel that traffic levels would take years to gain back the ground lost.
Even after traffic returns to normal, it is hard to figure out how the air travel situation will be. Motley Fool analyst Dan Caplinger, thinks that nobody will travel jam-packed in a plane anymore for fear of any new infections striking. That would affect the profit margins of airline carriers. If so, it would be way below how things were before Covid-19.
Airlines Could Continue Cost Cutting
The only way airlines would then be able to compensate for it is by raising fares. How will the traveling public take the fare hike? with people beginning to go back to their jobs and more. So, Caplinger argues they could not be prepared to handle the higher rates. The airlines would have to continue the cost-cutting measures they have adopted. That could result in significant layoffs.
Caplinger expects major turbulence in the coming months. For now, the massive rallies could be over. But things could be better than expected in the long run. For now, airline stocks need to get back to normal and adapt to the changing conditions. That would determine their feasibility as long-term investments.