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Airlines Are Struggling, but Delta Stock Is the Best of the Legacy Carriers

Delta Airlines (NYSE:DAL) is surging. At $39, DAL stock is at its highest level since mid-March, and is up more than 100% from the 52-week lows, and it’s not alone.

a Delta (DAL) plane flying through the clouds

Source: NextNewMedia / Shutterstock.com

Travel and tourism stocks have sprung back to life in recent weeks. That’s largely thanks to the advancement of several vaccines for preventing the spread of the novel coronavirus.

As the vaccines near their commercial launches, airlines have been one of the biggest winners. The U.S. Global Jets (NYSEARCA:JETS) exchange-traded fund is up more than 20% for the month of November.

So does Delta and the airline industry have even more room to climb ahead of it? In the short-term, probably. Particularly for Delta, as it’s in healthier shape than a number of its rivals.

However, let’s not make any mistakes here; airlines still need an expeditious distribution program for the vaccine for things to really start getting back to normal. While traffic is improving ahead of the holidays, it’s still down an awful long way overall.

Thanksgiving Traffic and DAL Stock

U.S. airline traffic is pointing upward now. On Friday, the Transportation Security Administration (TSA) screened more than one million passengers. This was just the second day since the pandemic hit that traffic topped one million people. Saturday was nearly as busy as well, and things should pick up further as Thanksgiving week plays out.

However, that million passenger figure is still far short of pre-pandemic levels. In fact, the combined Friday and Saturday total for the weekend ahead of Thanksgiving only hit 42% of last year’s passenger totals.

With various state and federal agencies warning people about traveling this holiday season, the travel rebound has started to fade. United Airlines (NASDAQ:UAL) has even seen a rise in cancellations recently as virus case counts have picked up and states tighten their social distancing measures.

When Will Business Travel Come Back?

The holiday traffic numbers are certainly going to be key for trading sentiment in airlines. Thanksgiving and then Christmas numbers will set the tone for the first part of 2021 on just how real the comeback in travel is.

That said, the more service-oriented legacy carriers rely on business travel to make their serious profits. Delta’s chief executive officer (CEO) Ed Bastian said as much. In a recent interview with the Financial Times.

“It will take up to two years before we fully see where business travel is going to be [at] a sustained level of demand,” he said. “I don’t expect it to be 100 per cent back to 2019 levels, but […] hopefully 75-80 percent of it.”

This is a significant concern for Delta and the other legacy carriers. For Delta in particular, corporate travel produced 50% of revenues prior to the pandemic. And it tends to be far higher profit margin than carrying around more frugal tourists.

Therefore, if Delta loses 20% of its business travel, that’s something like 10% of the overall revenue pool disappearing.

All that to say, if travel continues to spring back quickly for vacations and friends and family visits but corporate travel stays down, the budget carriers like Southwest (NYSE:LUV) and Spirit (NYSE:SAVE) will outperform Delta.

DAL Stock Verdict

If I had to own a legacy U.S. airline carrier today, I’d stick with Delta. It has the best balance sheet and strategic position to ride out the current slump.

As rivals like American (NASDAQ:AAL) lose billions of dollars and have to cut costs, it should give Delta a greater competitive edge. The recovery for airlines is going to take years. As such, the firms in the best position, namely Delta and Southwest, will have an extended window with which to build on their advantages.

And now, with value stocks flying, DAL stock is well-positioned heading into the holidays. Just be aware that the longer-term bread and butter of the company, business travel, isn’t set to really recover until at least 2022. That means that DAL stock, in turn will struggle to get back to its $60 pre-pandemic levels as well.

There’s potentially still upside from the current $40 level to $50 or so, however don’t expect too much more than that out of DAL stock in the near-term.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

Article printed from InvestorPlace Media, https://investorplace.com/2020/11/airlines-struggling-dal-stock-best-of-the-legacy-carriers/.

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