What happened
Shares of airlines and the businesses that support the industry have been hit hard by the COVID-19 pandemic, which has caused travel demand to all but evaporate and left airlines scrambling to cut costs.
We know the near-term damage to these businesses will be severe, but what we don't know is how long that damage will last. In recent days, markets have traded higher on a belief the worst of the pandemic might soon be behind us, sparking hope of a late spring recovery.
Shares of United Airlines Holdings (UAL -1.25%) gained 10% on Wednesday, while shares of American Airlines Group (AAL -1.77%) and Delta Air Lines (DAL 0.08%) both were up 5% around midday. And some of the businesses that rely on the airlines have performed well, too, with online travel agency Expedia Group (EXPE -0.40%) up more than 6% and Sabre (SABR 1.45%), which runs the back-end reservation systems for many airlines, up 8%.
So what
Investors, including high-profile ones, have dumped airline shares for weeks now as the companies have been forced to take drastic action to preserve their balance sheets and remain solvent through the pandemic. Delta, for example, said it expects second-quarter revenue to fall 90% year over year, adding that it is burning through about $400 million in cash reserves per week.
The industry is getting $50 billion in economic support to try to weather the storm, but no amount of assistance will be enough if travel does not return by late summer at the latest.
Image source: Getty Images.
Improving sentiment this week about how long the pandemic might last and optimism about the economy's ability to recover have provided a lift to airlines and the companies that support them. The industry came into this sudden downturn healthy by historical standards, and can likely survive even if travel only returns to typical recessionary levels. The greater the chances that the economy can quickly return to a more functional operation, the more travel stocks begin to look oversold.
For companies like Expedia and Sabre, it is going to be difficult to post solid earnings until travel returns. Sabre shares also likely got a boost after a Delaware judge ruled in the company's favor in an antitrust lawsuit brought by the U.S. Department of Justice seeking to block the company's $360 million purchase of Farelogix, which provides software to the airline industry.
Now what
Even with the recent gains, these stocks remain down between 43% and 71% year to date. That's hardly a surprise, given the way travel has declined and the uncertainty about how quickly it will return.
Travel company data by YCharts.
Investors need to be careful not to get ahead of themselves. While this week so far has been full of hope and enthusiasm, it would likely only take one batch of negative headlines about the pandemic's spread to a new region, or new lousy economic data, to send shares heading back in the other direction.
Even in the best-case scenario, near-term earnings are going to take a hit and the companies are going to be slow to recover. Given the risks, and the potentially slow and uneven recovery ahead, I'd recommend sticking with top operators like Delta.
