Are Airline Stocks Taking Off Too Soon?

This week, I will celebrate Thanksgiving without my siblings for the first time in my life. The reason, of course, is the coronavirus pandemic. I’m not happy about it, but it is worth the sacrifice to ensure our mutual safety.

Apparently, a lot of other folks feel the same way. According to the airline industry, passenger traffic has not spiked this week. If people are traveling for the holiday, most of them aren’t flying.

The last thing the airline industry needs right now is a surge in COVID-19. The summer vacation season was a bust. Now, the winter holiday season may fizzle out, too.

Nevertheless, airline stocks have risen this month. The U.S. Global Jets ETF (JETS) gained nearly 23% from the start of November through the end of last week. Its top three holdings are Southwest Airlines (NYSE: LUV), Delta Air Lines (NYSE: DAL), and United Airlines (NYSE: UAL).

Pushing airline stocks higher is the recent spate of successful COVID-19 vaccine trial results. On Monday, AstraZeneca (NSDQ: AZN) became the third drug maker this month to report a vaccine with 90%+ efficacy.

The other two, Pfizer (NYSE: PFE) and Moderna (NSDQ: MRNA), claim 95% efficacy for their vaccine trial results. To be sure, that is good news. The sooner all these vaccines can be produced and administered, the safer flying on a plane will become.

However, just how soon that day will arrive is still unknown. The vaccine produced by AstraZeneca was developed at the University of Oxford. The partnership claims that 700 million doses will be available within four months.

Of that amount, 70 million doses will be set aside for use in Great Britain. If all goes according to plan, the entire population of the United Kingdom could be inoculated by April 1.

Test Subjects

I last wrote about JETS five months ago. At that time, the airline industry had lifted capacity restrictions to allow full fights. I stated then: “A contrarian investor might argue that now is the perfect time to buy JETS. Its share price is lower than it’s ever been and the coronavirus pandemic won’t go away.”

That contemplation has proven true. Since then, JETS has gained 25%. Over the same span, the SPDR S&P 500 ETF Trust (SPY) has returned 14%. Presumably, there is considerably less risk in airline stocks now than there was then compared to the overall stock market.

I’m not sure that I agree with that assessment. I do not doubt the efficacy of the vaccine candidates. I also believe that it won’t be long until the general public will have access to one or more of them.

What I do question is the pace at which the vaccines will be administered and the consequent effect on air travel. I know I’m not boarding a plane until I’m vaccinated and most other people are, too.

I also would not consider boarding a cruise ship, as I discussed at the start of this week. It’s not that I don’t want to take a vacation. It’s that I don’t want to risk being exposed to COVID-19 even more.

Apparently, not everyone feels the same way I do. Last week, the CEO of Royal Caribbean (NYSE: RCL) posted on his personal Facebook (NSDQ: FB) account that more than 100,000 people volunteered to be test subjects on a cruise.

I must admit to being surprised by that number. Last month, the first cruise ship to go out since the pandemic began suffered an outbreak of COVID-19 despite using the same safety protocols that Royal Caribbean will employ.

Timing Problem

Like cruise ships, jet airplanes are enormously expensive to obtain and operate. Idling those fleets results in hundreds of millions of dollars in lost income every month. But cramming passengers into them while the virus is still spreading may turn out to be more expensive in the long run.

It’s no secret that many companies in the travel industry are teetering on the brink of collapse. For that reason, no course of action is without huge costs. Wait too long to resume operations, and many of them may go under. But open too soon, and the coronavirus pandemic may surge to even higher levels.

In other words, this is a timing problem. The virus is surging now, while the vaccines won’t be widely available to the general public for several more months. For that reason, I expect things to get worse before they get better.

That being the case, this may be an opportune time to buy a put option on JETS. Put options increase in value when the value of the underlying security decreases in price.

A few days ago while JETS was trading near $21, the put option that expires on March 19 at the $20 strike price could be bought for $2. That means JETS must drop below $19 by expiration for this trade to be profitable.

A month ago, before the vaccine news, JETS was trading below $17. I think it may bottom out around there again this winter. If it does, then the return on this trade would be 100%. Of course, I might be wrong in which case this option could expire worthless.

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