Airline stocks fell off a cliff at the onset of the COVID-19 pandemic in March 2020. As borders were shut and lockdowns were imposed, travel came to a standstill. The rollout of vaccinations in early 2021 led to an increase in domestic travel as international quarantine rules turned away lucrative travelers.

Last month a new COVID-19 variant called Omicron was detected in South Africa.  It has since been spreading throughout the world and has led to countries imposing serious restrictions and lockdowns.

This has resulted in another round of selling in airline stocks, such as Southwest (LUV) and Delta (DAL). For long-term contrarian investors, now could be an opportunity to scoop up shares of one of these stocks at cheaper prices.  Therefore, today I’ll analyze both stocks to determine if now is a good time to add them to your portfolio.

Southwest Airlines

Shares of Southwest Airlines have fallen by 28% in the last six months. The low-cost airline was in fact profitable for 47 consecutive quarters prior to COVID-19 which is a breathtaking feat considering the cyclical nature of the travel industry.

In Q3, Southwest reported revenue of $4.68 billion and a loss of $0.23 per share. Comparatively, Wall Street forecast revenue of $4.58 billion and a loss of $0.27 per share in the third quarter of 2021. While Southwest beat analyst estimates in Q3, it had initially expected to turn profitable in the quarter ended in September. These estimates were then revised lower in August and September.

Southwest’s management also expected capacity in Q3 of 2021 to be close to the same period in 2019. However, revenue was down 17% compared to Q3 of 2019 on the back of a decline in unit revenue.

Southwest has also lowered capacity plans for Q4 of 2021 and expects this metric to decline by 8% compared to 2019. Its top-line might fall between 15% and 25% in Q4 compared to the December quarter of 2019.

Delta Airlines

Shares of Delta Airlines have declined by 19% in the last six months. In Q3 of 2021, Delta Airlines revenue fell 34% compared to the same period in 2019. Despite this decline, Delta Airlines reported a pre-tax profit of $216 million and adjusted earnings of $0.30 per share. Wall Street expected Delta Airlines to report adjusted earnings of $0.17 per share.

If we include federal benefits received by the company, Delta Airlines’ pre-tax profit surged to $1.5 billion while adjusted earnings rose to $1.89 per share.

In Q4, Delta expects a sequential rise in sales as capacity might touch 80% of pre-COVID-19 levels, which should cheer investors.

The verdict

Investing in airline stocks such as Delta and Southwest carry significant risks given the uncertainties surrounding the Omicron variant and the less-than-impressive rollout of vaccinations in underdeveloped nations. Even if the Omicron variant is bought under control or is not as threatening as other variants, the pandemic is far from over.

The global shift towards remote work might also reduce the extremely profitable business class travel over the upcoming decade which is a long-term headwind.

There are far better stocks with stronger fundamentals and growth prospects you should place your bets on right now. It's better to avoid Delta and Southwest at current prices, despite the recent decline in stock prices.

LUV shares were trading at $39.11 per share on Monday morning, down $0.55 (-1.39%). Year-to-date, LUV has declined -16.09%, versus a 22.02% rise in the benchmark S&P 500 index during the same period.

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.

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