By Claudia Assis
News about the omicron variant of the coronavirus rattled U.S. airline and travel-related stocks this week, with headlines about the return of travel bans in several countries leading to concerns about the industry’s recovery during a relatively strong Thanksgiving traveling season.
The World Health Organization designed omicron as a “variant of concern” on Friday as the U.S. and several others imposed travel bans from countries in southern Africa. The organization has urged a “calm, coordinated and coherent” world response to the variant as studies to better understand the mutations are under way.
Stocks of major U.S. airlines showed some resilience initially, but were among the worst-hit in Tuesday’s selloff. The U.S. Global Jets ETF (PSE:JETS) has lost slightly more than 3% this week, with stocks of U.S. airlines more exposed to international travel, such as United Airlines Holdings Inc. (NAS:UAL) and American Airlines Group Inc. (NAS:AAL) underperforming.
The travel restrictions hit right as U.S. travelers took off on domestic routes at almost the same pace as in 2019, according to TSA checkpoint data. Travel in Europe, which had benefited from the reopening of the trans-Atlantic market in early November, saw declines even before the omicron news as several European countries were struggling with another wave of rising COVID-19 cases.
Omicron represents a “minor disruption at the moment,” as the path that the variant might take in countries with higher vaccination rates is unknown, said Peter Arment, an analyst with Baird, in an interview.
So far it looks like the disruption is similar to that caused by the delta variant initially, with domestic travel likely remaining on track, although there is concern that the headlines might prompt some people to hold off on plans for spring travel, he said.
A decline of about 20% in U.S. airline stocks in June and July is tied to concerns about the delta variant, said Jefferies analyst Sheila Kahyaoglu in a note to clients.
“We would not expect to see the same fall with this outbreak as stocks were already trading at the lowest levels since February 2021,” she said.
If omicron spreads as much as delta did, there will be an effect on travel and demand, but that doesn’t change medium-term expectations about U.S. airlines, Kahyaoglu said.
“We continue to think that airline balance sheets are not at risk and will be able to navigate the impact of a variant’s effect on air travel.”
Among U.S. airlines, Kahyaoglu said she favors Delta Air Lines Inc. (NYS:DAL) “despite 15% exposure to Transatlantic travel” and Southwest Airlines Co. (NYS:LUV) given its domestic U.S. exposure at about 95%.
Domestic travel has been the driver of the U.S. travel industry recovery, and “at least for the time being omicron is impacting long-haul international travel to some specific markets,” said Peter McNally, an analyst at Third Bridge.
“These markets are served by widebody aircraft that have only very recently been redeployed to begin service. Aircraft can be redeployed where needed and these widebodies had only recently been moved into these impacted markets,” he said.
McNally is expecting American, Delta, and United to report fourth-quarter revenues that are still 20% to 30% below the same period in 2019, with JetBlue Airways Corp. (NAS:JBLU) about 10% off its pre-COVID pace and Spirit Airlines Inc. (NYS:SAVE) expected to show a full recovery.
“The major carriers still have the gaps in business and international travel to fill before they can see revenues fully restored,” he said.
One of the new challenges brought about the pandemic is that people are booking travel with less advance time than in the past, making it more difficult for airlines to plan. And airlines are facing the same labor shortages and challenges as other service industries, he said.
U.S. airlines are expected to report fourth-quarter results in late January.