Airline stocks like easyJet, Wizz Air, and International Consolidated Airlines Group (IAG) are among the top gainers as I write this Tuesday afternoon. Interestingly, other travel-related stocks like the cruise operator Carnival and hotels group Whitbread are also big risers.
The return of investor bullishness?
Clearly, it appears that at least momentarily, investors have shaken off nervousness about the return of the pandemic. While it is still quite a bit under control, in the recent past there have been reports of rising cases across major economies. This has spooked markets. Along with that, it has dragged down travel stocks. For instance the easyJet share price was down over 5% in a month at yesterday’s close. The IAG share price fell by an even sharper 9%.
So the upturn looks like particularly good news to me, even though it is still the middle of the day as I write. There is no way of knowing where their share prices will be by market close today or even an hour later. So far though, I am optimistic.
Positives for travel stocks
Also, the outlook for travel has improved considerably, which keeps me positive. Last month easyJet reported that it was operating five million seats on flights between the UK and green and amber list destinations. It also reported a sharp surge in summer booking trends to amber countries alone as well.
British Airways owner IAG also reported a substantial increase in passenger capacity in the summer months from the quarter before. Low-cost airline Wizz Air also reported that its planes were 79% full during July. There are plenty of other positives for travel stocks too, as I pointed out in my article on TUI and Carnival earlier today.
Challenges ahead for airline stocks
However, realistically speaking, I think aviation stocks and more generally the travel sector will see share price increases only in fits and starts. That is just the nature of the recovery. While progress has clearly been made, the challenges are rising too. For instance, IAG has pointed to inflation as a potential threat in some of its recent updates. As the economy picks up speed, oil prices are expected to rise. And this is at a time when it is still making losses.
How far the travel recovery continues beyond the summer months also remains to be seen. Coronavirus cases can rise faster in the winter months, which may put a dampener on further recovery. Also, global economic recovery may slow down because of a recent rise in these cases.
Despite these risks, I bought easyJet and IAG shares anyway. This is because even considering the risks, I think their share prices are way too low. IAG for instance, is at less than half its pre-pandemic levels. easyJet has fared slightly better, but its share price is still quite weak too. These compare favourably to Wizz Air, whose share price is way higher than its pre-pandemic levels. I am sitting tight, and waiting for a sustained rise in my aviation holdings’ prices for now.
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Manika Premsingh owns shares of easyJet and International Consolidated Airlines Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.