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Why Airline Shares Are Up Today

By Lou Whiteman - Mar 26, 2020 at 10:02PM

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The Cares Act should give the sector the runway it needs to get through the pandemic.

What happened

Shares of airlines on Thursday traded up for the third straight day as investors continue to applaud the $2 trillion economic relief package making its way through Congress. Airlines are set to receive about $50 billion in aid as part of the package, which hopefully will be enough to get them through the COVID-19 coronavirus pandemic-related travel slowdown.

Shares of Delta Air Lines (DAL -1.07%), American Airlines Group (AAL -0.29%), Southwest Airlines (LUV -0.88%), and JetBlue Airways (JBLU -2.39%) all opened up more than 10% on Thursday, and shares of United Airlines Holdings (UAL -1.62%) traded up 9%. All have retreated somewhat as the day went on but remain in the green as of 2:45 pm.

So what

The airlines were among the hardest hit sectors due to the pandemic, with travel demand evaporating overnight as the virus spread globally. Carriers have responded by cutting flights, freezing hiring, and grounding planes, but no amount of cutting is likely to be enough when revenue is supposed to drop by 80% or more.

Two planes flying toward each other with jet trails.

Image source: Getty Images.

The so-called Coronavirus Aid, Relief, and Economic Security Act, "CARES Act," offers assistance to try to deaden the blow and allow airlines to avoid mass layoffs or bankruptcy. Commercial airlines will receive up to $25 billion in loans and loan guarantees, and have access to another $25 billion in grants.

The help comes with conditions limiting share buybacks and executive compensation for as long as the loans are outstanding, and the grants might be tied to an equity or warrant issuance. But despite those terms, investors have been celebrating in recent days because the assistance should help airlines to work with private lenders and other counter-parties to access additional private-sector liquidity.

Now what

Even with the rally this week these shares are still off between 15% and 48% over the last month. The airlines are still priced for an extended downturn at best, and a bankruptcy at worst, and with the government backstop finally arriving, it might be a good time to look for buying opportunities.

I think it is safe to buy airlines despite the continued pandemic uncertainty. Just be picky about buying best-of-breed companies, and be warned that as long as the uncertainty remains it is likely volatility will eventually return to the sector.

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Stocks Mentioned

JetBlue Airways Corporation Stock Quote
JetBlue Airways Corporation
JBLU
$8.37 (-2.39%) $0.20
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
AAL
$13.84 (-0.29%) $0.04
Southwest Airlines Co. Stock Quote
Southwest Airlines Co.
LUV
$36.19 (-0.88%) $0.32
United Airlines Holdings, Inc. Stock Quote
United Airlines Holdings, Inc.
UAL
$36.37 (-1.62%) $0.60
Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
DAL
$29.50 (-1.07%) $0.32

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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