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Why Airline Stocks Are Up Today

What happened

Airline shares gained altitude on Monday thanks to a series of positive signs concerning the industry's post-pandemic recovery. United Airlines Holdings (NASDAQ: UAL), American Airlines Group (NASDAQ: AAL), and Spirit Airlines (NYSE: SAVE) led the way higher, each up more than 5% at one point on Monday.

So what

It's been a difficult last 12 months for airlines, as the pandemic caused demand for travel to dry up and sent the entire industry into the red. We've seen a slow recovery in the shares in recent months thanks to the development of vaccines and signs there is pent-up demand for travel once it is safe. And on Monday we got a fresh batch of good news to send the stocks higher.

Image source: Getty Images.

A vaccine developed by Johnson & Johnson got the green light from U.S. regulators over the weekend, which means the country now has three vaccines to deploy against the virus. A $1.9 trillion stimulus bill also passed the U.S. House of Representatives over the weekend, bringing it one step closer to becoming law. The bill contains additional funds to support airline payrolls, and should help make sure the economy is strong as the population starts making travel plans for the summer.

United did its part to get investors excited, adding to its Boeing 737 MAX order and pushing forward some deliveries in anticipation of an expected rebound in demand.

Spirit is likely coming along for the ride because the airline, with its industry-low costs and focus on leisure travelers, is expected to be among the first to fully bounce back post-pandemic. American, meanwhile, got a price-target boost to $20 from $14 from Stifel.

Now what

With each passing day, investors are growing more confident the worst is over for the airlines. They're right, but they need to be careful not to get ahead of themselves.

There is still some risk to the summer travel season, and even if vacationers do return in the months to come, it is likely going to be years before more-lucrative parts of the aviation market, including business and international flying, recover.

And while most of the airline stocks still trade at a discount to where they were pre-pandemic, if you factor in the amount of debt the industry has taken on to survive the crisis, the valuations are beginning to look frothy. Looking at the industry in terms of enterprise value (a measure of total market capitalization plus debt), some are actually up from the beginning of 2020.

Airline stocks are still attractive for those with a long time horizon, but they are no longer the bargains they were just a few months ago.

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Lou Whiteman owns shares of Spirit Airlines. The Motley Fool owns shares of Spirit Airlines. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.


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