Shares of Alaska Air Group (NYSE:ALK) climbed nearly 10% on Tuesday afternoon as investors took a second look at airline stocks, which have been beaten down by fears of a travel slump related to COVID-19 outbreaks. The impact on airlines is real, but with shares of Alaska down more than 36% year to date heading into Tuesday trading, the sell-off is beginning to look overdone.
Airlines have been among the sectors hit the hardest during the coronavirus sell-off, as investors react to travel demand all but evaporating in areas where the outbreak is most prevalent. The sell-off has increased in recent days as concerns grow that health fears will lead to sustained weakness through the key spring break and summer vacation travel seasons.
On Tuesday some of the nation's largest airlines announced plans to cut capacity in response to declining demand, easing concerns that the industry would end up in a balance sheet-destroying fare war. While Alaska has not said much other than to warn it expects first-quarter unit revenue to be down, the airline should benefit from its larger brethren taking action.
Airline stocks are also reacting favorably to the dramatic plunge in crude prices, which should bring down fuel expenses. The drop represents an annualized savings of up to $2 billion for some of the larger carriers and should help all of the airlines to at least somewhat offset falling demand.
There is a long history of airlines failing during downturns, so it's understandable that airline investors have been spooked by the negative headlines and suggestions that the coronavirus outbreak could drive the U.S. into a recession. However, airlines are far better prepared for a recession this time around than they have been in the past, and I believe all of the publicly traded carriers can fly through this turbulence.
Alaska Air is in the early stages of a turnaround story as it completes the integration of Virgin America and revamps its network to focus on areas of competitive strength. That turnaround could take longer than anticipated due to the coronavirus, but the long-term investment case for buying the stock is just as solid today as it was back in January.