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Why Airline Shares Are Up Today

By Lou Whiteman – Apr 14, 2020 at 11:40AM

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The industry is closing in on much-needed bailout funds.

What happened

Airline stocks were under pressure on Monday due to investor fears that the much-anticipated federal bailout funds might be more difficult to access than first imagined. A day later, the outlook for a bailout is much better, and airline stocks are responding with gains.

Shares of United Airlines Holdings (UAL 6.86%) were up 10% as of 10:30 a.m. EDT on Tuesday, while shares of Delta Air Lines (DAL 8.14%), American Airlines Group (AAL 7.89%), Alaska Air Group (ALK 6.21%), and Allegiant Travel (ALGT 7.72%) were all up more than 7%.

A collection of other airlines including Hawaiian Holdings (HA 5.97%), JetBlue Airways (JBLU 7.68%), Southwest Airlines (LUV 5.78%), and Spirit Airlines (SAVE 3.29%) were all up more than 5%.

So what

Airlines have been hit hard by the COVID-19 pandemic, which has caused revenue to fall upward of 90% year over year as demand for travel has evaporated. The companies are cutting flights, grounding planes, and seeking other ways to cut costs, but are relying on $25 billion in government grants to make payroll and avoid a massive wave of layoffs.

Some airline stocks lost more than half their value in March, but the sector was stabilized somewhat by the passage of the $2 trillion economic stimulus plan containing the airline bailout.

An airplane taking off.

Image source: Getty Images.

The requirements to receive government funds have proved to be more onerous than expected, leading to weekend news reports suggesting some airlines might not gain access to the funding package as expected. That sent shares falling on Monday.

Tuesday's headlines are much more optimistic, with Reuters reporting that several large airlines were close to agreeing to the terms and quoting airline industry officials who expect all major airlines to accept the payroll grants "in the coming days."

Reuters reported that the requirements had not changed, meaning the airlines would have to pay back 30% of the funds and issue warrants for some of the total amount they receive.

It's unclear how much each airline would get. Based on 2019 data, Reuters estimates American and United are each eligible for about $6 billion in grants, while Delta would qualify for about $5.6 billion and Southwest about $4 billion. But given that the total requests are likely to far exceed the $25 billion available, airlines are unlikely to get the full amount they request.

Now what

There was always reason to believe the two sides would resolve differences over the terms of the bailouts. The airlines need the cash, and the White House can ill afford to see thousands of furloughed employees at a time when jobless claims are skyrocketing. The fewer requirements, the better for airline investors. But given the criticism surrounding the bailout and the wording of the legislation, which gave the U.S. Treasury broad leeway in determining the terms for the aid, some restrictions were always likely.

The grants are not a panacea, and the airlines are unlikely to really take off until the pandemic is in the past and the U.S. economy begins to function again. If we exit this period in a recession, as seems likely, it could take until 2021 (if not longer) for the industry to fully recover.

Some discretion is required even assuming the bailout funds are delivered. But for investors willing to take the long-term view and focus on top companies, there is reason to believe the airline sector has finally bottomed out.

Lou Whiteman owns shares of Delta Air Lines and Spirit Airlines. The Motley Fool owns shares of and recommends Delta Air Lines, Southwest Airlines, and Spirit Airlines. The Motley Fool recommends Alaska Air Group, Hawaiian Holdings, and JetBlue Airways. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Alaska Air Group, Inc. Stock Quote
Alaska Air Group, Inc.
$42.39 (6.21%) $2.48
JetBlue Airways Corporation Stock Quote
JetBlue Airways Corporation
$7.15 (7.68%) $0.51
Southwest Airlines Co. Stock Quote
Southwest Airlines Co.
$33.02 (5.78%) $1.80
Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
$30.56 (8.14%) $2.30
Spirit Airlines, Inc. Stock Quote
Spirit Airlines, Inc.
$20.12 (3.29%) $0.64
United Airlines Holdings, Inc. Stock Quote
United Airlines Holdings, Inc.
$35.06 (6.86%) $2.25
Hawaiian Holdings, Inc. Stock Quote
Hawaiian Holdings, Inc.
$14.02 (5.97%) $0.79
Allegiant Travel Company Stock Quote
Allegiant Travel Company
$80.06 (7.72%) $5.74
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
$12.86 (7.89%) $0.94

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

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