Coronavirus vaccines are here, but that doesn't necessarily make all airline stocks good buys

Published Fri, Dec 18 20201:03 PM ESTUpdated Fri, Dec 18 20201:52 PM EST

U.S. airline executives are looking ahead to 2021, happy to put a bruising year behind them. The pandemic ended their decade-long streak of profits, sparking losses of more than $20 billion this year. Airlines poised to weather what's going to be a difficult start to 2021 will be those with heavily focused domestic networks that cater to mostly leisure travelers and with little if any corporate and international business, like Allegiant Air , analysts said. Struggling U.S. airlines eyeing a recovery later this year did finally get some good news this month: coronavirus vaccines are on their way. Hours after the U.S. approved Pfizer and BioNTech's vaccine, millions of doses started winding through temperature-controlled supply chains, even in the bellies of passenger planes themselves, to the public. American , Delta and United have each soared more than 30% this quarter as of Thursday's close, three times the S & P 500's gain, after strong results from vaccine trials. Airline executives have repeatedly said travelers won't return en masse until there's a widely available vaccine. "A light at the end of the tunnel," is how United CEO Scott Kirby described the arrival of the vaccines. Delta CEO Ed Bastian estimated the carrier, which is burning an average of $12 million to $14 million a day this quarter, about half the rate it was burning over the summer, could break even next spring thanks to the vaccines. Deutsche Bank said in a note last week that once the vaccine is distributed widely, "the surge in demand for air travel could be like nothing we have ever before experienced." But like the task of vaccinating millions of people, a revival of travel demand that has been decimated by the pandemic will take months. "It won't be just suddenly one day we get up and everything is different," said Savanthi Syth, airline equity analyst at Raymond James. That could mean there's little fuel — barring additional federal aid — to lift airlines in the medium term. Grim outlook Airline executives know they're in for a tough winter. Demand is slowing following the latest spike in coronavirus infections coupled with new restrictions and government warnings against travel, airlines have warned recently. Southwest "currently estimates the softness in leisure passenger demand and bookings to continue into January 2021," the Dallas-based carrier said in a filing this week. "Thus far, leisure bookings for holiday travel in late December 2020 and early January 2021 are outpacing leisure passenger demand and bookings in non-holiday time periods for both months." Even peak holiday periods have been paltry compared with 2019. The U.S. Energy Information Administration said U.S. airlines' jet-fuel demand rose to a pandemic high during Thanksgiving week, but that was just 55% of last year's levels. And the week before Christmas, passenger volumes are still struggling to climb to more than a third of last year's levels, according to Transportation Security Administration data. That trend is weighing on revenue and countering carriers' efforts to curb cash burn. The seven largest U.S. airlines are on track to post annual losses exceeding $29 billion, according to analyst estimates compiled by FactSet, including Southwest's first annual loss in 48 years. The industry is "somewhat bereft of catalysts until mass vaccinations take place" over the next several quarters, Morgan Stanley said in a note Monday. The pandemic broke U.S. airlines decade-long stretch of profits. Deutsche Bank doesn't expect all U.S. airlines to return to profitability until 2022 and notes that even in the recovery, airlines are entering next year with a record debt load of $170 billion. That means "airlines will have no choice but to allocate the majority of their free cash flow to debt paydown," the bank said. Battling for a slice of a smaller pie The pandemic has forced airlines, particularly legacy carriers with sprawling international networks to shrink. In January, Raymond James estimates that just 60% of 2019 capacity will be restored. With international and business travel still largely grounded, carriers in the near term will keep fighting for a smaller, and less lucrative pool, of mostly domestic travelers . What began as a wholesale slashing of routes as demand hit the lowest points of the pandemic in the spring has turned into a battle between carriers to launch destinations and routes that cater to leisure travelers seeking outdoor space. That trend has airlines experimenting with new routes . United, for example, added several nonstop flights to four destinations in Florida from nonhub airports in the North for the winter season. Southwest added service to Palm Springs, California, last month and on Wednesday announced it will serve Fresno and Santa Barbara. Airlines that focused on those travelers before the pandemic are on stronger footing, says Raymond James' Syth. The best positioned to weather the crisis is Allegiant , said Syth. The $2.8 billion leisure carrier is up just over 1% this year, compared with more than 40% declines in American and United and about 30% at Delta, despite recent rallies. She also noted that Alaska Airlines ' heavy focus in domestic travel should work in its favor. The lengthy downturn, however, may continue to weigh on stocks, so investors might have to be patient. Deutsche Bank expects a sharp rise in demand from the depths of 2020 but downgraded U.S. carriers' stocks to hold from buy, although it raised price targets. "One final observation about airline stocks is that the recovery trade is never straight up and to the right; it is a meandering journey, with setbacks along the way, rather than a sprint to higher equity values," said Deutsche Bank airline analysts.

An American Airlines Inc. McDonnell Douglas MD-82 plane sits parked at a gate while a United Continental Holdings plane taxis down the runway at LaGuardia Airport in the Queens borough of New York.

Michael Nagle | Bloomberg | Getty Images

Airlines poised to weather what's going to be a difficult start to 2021 will be those with heavily focused domestic networks that cater to mostly leisure travelers and with little if any corporate and international business, like Allegiant Air, analysts said.