Companies in the travel and tourism industry have been among the worst casualties of the Covid-19 pandemic. After all, worldwide lockdown restrictions have caused the number of people travelling to plummet. As a result, most companies in the sector have been bleeding cash for a while now.
Among those particularly hard hit are the airlines. With passenger numbers down by around 90% at present, I’d be forgiven for seeing them as poor investment targets.
Nevertheless, I think many travel stocks – particularly the airlines – look very cheap right now. As such, I think they could be among the strongest gainers throughout 2021. Here’s why.
A vastly improving outlook for the airline industry
After months of doom and gloom from the pandemic, we finally have some good news on the cards. Namely, the international rollout of several Covid-19 vaccines. Unsurprisingly, the idea of a return to air travel has become a real prospect for 2021 and beyond.
Think of the pent-up demand for foreign travel and holidays, which has been brewing over the last nine months or so. Once it’s safe to do so, I expect a mass return to summer holidays, winter getaways and weekend retreats.
While there are plenty of obstacles to navigate along the way, it’s hard to deny the presence of a vastly improving outlook for the airline industry. However, a return to pre-Covid passenger numbers won’t come overnight. In fact, analysts warn it could take years and this will remain a challenge for travel-linked stocks.
Nonetheless, a steady increase in passenger numbers throughout 2021 and beyond is encouraging news for airlines and their finances.
What about the easyJet, IAG and TUI share prices?
Speaking of which, the toll on airline revenues is evidenced by the sharp fall in the share prices of companies such as easyJet, International Airlines Consolidated Group and TUI. The three companies have shaved around 40%, 36% and 31% off their respective valuations since the beginning of 2020.
Although since then, their share prices have been rising, all three remain a significant way from their pre-Covid valuations. This means there could be plenty of room for growth over the coming years. That said, it will be largely dependent on a swift recovery for air travel.
From November through to early December, I think we got an early glimpse of what an improving outlook for the airline industry could look like in terms of rising valuations. The easyJet, IAG and TUI share prices each rallied by around 80%, nearly doubling in the space of one month.
A potentially lucrative investment opportunity?
However, I think that rally was a little premature. After all, we haven’t yet witnessed a mass return of air passenger travel and there appears to be some way to go before the majority of the population is vaccinated. With that in mind, I wouldn’t rule out a potential pullback over the coming weeks and months.
In spite of this, I remain confident that the three share prices stand a strong chance of doubling in 2021 thanks to an improved outlook for the industry and the smooth rollout of the Covid-19 vaccination programme. I’d buy today and hold for the long term.
Matthew Dumigan has no position in any of the shares mentioned. 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.