3 Stocks to Watch in the Omicron-Variant Hit Airline Industry

The spread of the highly transmissible COVID-19 variant (B.1.1529 strain) across many countries worldwide including the United States is the latest setback for the Zacks GOL .

Industry Overview

The Zacks Airline industry comprises companies engaged transporting passengers and cargoes to various destinations, globally. Most operators maintain a fleet consisting of multiple mainline jets in addition to several regional planes. Operations are aided by their regional airline subsidiaries and third-party regional carriers. Additionally, industry players utilize their respective cargo divisions for offering a wide range of freight and mail services. The well-being of the companies in this industrial group is linked to the health of the overall economy. For example, the spread of the omicron variant of COVID-19 in most parts of the world induced multiple flight cancellations as crew members fell ill due to the highly contagious strain. This development disrupted holiday travel plans of many in the United States, in turn denting passenger revenues of airline companies.

Key Themes Governing the Airline Industry

Omicron-Variant Spread Stings Airlines: Agreed that the aviation space had a much better run in 2021 than the coronavirus-ravaged scenario in 2020. However, the airlines seem on the backfoot again with a slew of flight cancellations over the past few weeks. Omicron-induced staff crunch and weather woes prompted the U.S. carriers to call off multiple flights, upsetting travel plans of many passengers. Some carriers even trimmed their schedule for the current month.

Even though the fourth-quarter 2021 earnings season is in its nascent stage, airline players that already released their numbers, provided disappointing outlooks for the March quarter, particularly on the revenue front, due to the omicron-led crisis.

5G Rollout Fears an Added Woe: Per a delayed temporarily , the overhang will remain unless a permanent solution to the problem is found.

Oil Price May Increase in 2022 Hurting Bottom Line: The U.S. Energy Information Administration (EIA) in January 2022, increased its oil price forecast . The EIA in its current-month's short-term energy outlook stated that it expects the average Brent spot price to be $74.95 per barrel for the full year. This marks an increase from its December forecast wherein it had expected the average Brent spot price at $70.05 per barrel for 2022. It projects the same to average $78.63 per barrel during the first quarter of 2022. This estimate is $5.63 per barrel higher than its previous prediction.

EIA’s hiked forecast for oil prices is an unfavorable development for the airlines and might dent bottom-line growth. This is because fuel expenses represent one of the highest input costs for these players.

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Zacks Industry Rank Indicates a Bearish Outlook

The Zacks Airline industry is a 28-stock group within the broader Zacks Transportation sector. It currently carries a Zacks Industry Rank #247, which places it in the bottom 3% of more than 250 Zacks industries.

The group’s Zacks Industry Rank , which is basically the average of the Zacks Rank of all the member stocks, indicates dim near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Before we discuss a few stocks from the industry, it is worth taking a look at the industry’s shareholder returns and its current valuation.

Industry Underperforms Sector and S& P 500

Mainly due to the omicron-triggered woes, the Zacks Airline industry has underperformed the Zacks S&P 500 composite as well as the sector over the past year.

The industry has decreased 12.3% over this period against the S&P 500’s rise of 14.4%. The broader Zacks Transportation sector has increased 3.7% in the same period.