The Delta Variant Has Sapped Travel. Two Stocks for Turbulent Times.

There’s likely more uncertainty ahead, owing in particular to concerns that business travel, a key revenue and profit engine for some airlines and lodging companies, won’t return to prepandemic levels soon.

“We did start to travel a little bit more, but when the Delta variant came up it got pulled back,” says Rick Wakida, global travel manager at Informatica, a tech company based in Redwood City, Calif. “So we’ve seen a significant decline in travel versus prepandemic travel levels.”

The pressure on travel and leisure stocks extends across many industries, from cruise lines to airlines to lodging companies.

“When I talk to investors about travel stocks in general, there’s not a lot of conviction in anything for the next six months,” says Chris Woronka, an analyst who covers cruise operators, timeshare firms, and car-rental firms for

Deutsche Bank.

Consider domestic leisure travel, which had been strong this year until the Delta variant reared its head in industries such as cruise lines. While there haven’t been any outbreaks aboard ships like the devastating ones early in the pandemic last year, some Covid cases have been reported and that has led to some delayed travel.

“These cruise lines are setting sail,” says Brandt Montour, an analyst at J.P. Morgan. “There’s been no material change to the industry’s recovery of capacity,” though he notes that some customers are pushing back sailings.

For business travel, two of the hardest-hit travel and leisure industries are airlines and lodging. It has been a tale of two markets in 2021 for airline stocks—the first being a surge on the expectation of a post-Covid reopening, and the more recent one in a dialing down of those hopes.

“The optimism of hey, it was going to be a quick and easy recovery from the pandemic, completely went away,” says Ravi Shanker, North American airlines analyst at Morgan Stanley. “Everyone knew that the so-called rebound trades were going to have a problem if the Delta variant became a pretty big issue.”

And it did.

In a Sept. 9 filing, for example,

Southwest Airlines (ticker: LUV) said that it “continues to experience softness in bookings and elevated trip cancellations, especially close-in” due to the Delta variant. It added that “the softness in leisure bookings has continued, thus far, for September and October,” while business-travel bookings were estimated to remain “relatively stable” versus last month.

Shares of Southwest Airlines,

American Airlines Group (AAL),

United Airlines Holdings (UAL), and

Delta Air Lines (DAL) have all posted double-digit losses since the end of May. From Dec. 31 of last year through May 28 of this year, Southwest was up 32%, United 35%, Delta 19%, and American 54%.

Shanker, who is bullish on the airline industry, has an Overweight rating on Delta, partly owing to what he considers to be a strong management team and route network. “They have a lot of corporate exposure, but they don’t have as much long-haul international exposure as United and American do,” he says.

A big weight on business travel—and stocks tied to it—has been the further delay in office reopenings due to the Delta variant. Google parent

Alphabet (GOOGL), for example, said late last month that it was extending its voluntary return-to-work policy through Jan. 10, one of many companies to make such a move.

“The expectation was that we would see a surge in the back-to-office rate shortly after Labor Day and that we would start to see business travel pick up,” says Bill Crow, head of real estate research at Raymond James. But that hasn’t happened.

A Deloitte report released in early August, titled in part “How the pandemic is reshaping corporate travel,” stated: “Travel use cases have been re-evaluated based on their impact on the bottom line and the environment, as well as how well they can be replaced by widely adopted tech platforms.”

“What you’ll see is fewer business trips but longer stays,” says Crow, partly owing to “the whole ESG focus.”

One area of promise in business travel: the market that caters to individual business customers. Steve Reynolds, CEO of TripBam, which works with companies on hotel reservations for business trips, says that market continues “to see a nice increase in bookings post-Labor Day.”

Still, headwinds remain for certain segments of corporate and group travel, including trade shows and conventions. “I’m not seeing a huge uptick in business travel,” says Joan Eisenstodt, who runs a Washington, D.C., consulting business that works with conference organizers and hospitality firms. “People are concerned.”

Case in point: The National Association of Broadcasters said on Sept. 15 that it was canceling its in-person annual convention scheduled for next month in Las Vegas and that it will be held there next April.

Among the companies Crow sees as well positioned to weather the uncertain environment is

Hilton Worldwide Holdings (HLT), which “continues to have a greater relative focus on lower price-point hotels that have done relatively better” during the pandemic.

Even if business travel gets pared back longer term, Crow says, the lodging companies will make up for it thanks to growing markets like China and India. “There’s going to continue to be growth in global travel regardless of the business [travel] thing,” he says.

In the meantime, Delta Air Lines and Hilton could be a safer place for investors to weather the volatility.

Write to Lawrence C. Strauss at [email protected]