What happened
Airline stocks flew higher at the open on Wednesday after the industry secured agreements with the Treasury Department for the first tranche of bailout funds, providing reassurance to investors worried the airlines could end up bankrupt due to the COVID-19 pandemic.
Shares of JetBlue Airways (JBLU 5.63%) opened the day up 11.5%, while shares of American Airlines Group (AAL 2.98%) and United Airlines Holdings (UAL 4.98%) were both up more than 5% at the opening bell.
The stocks later gave back some of those gains, but the entire industry -- including Delta Air Lines (DAL 3.05%), Southwest Airlines (LUV 1.19%), Alaska Air Group (ALK 1.16%), Hawaiian Holdings (HA 0.15%), Allegiant Travel (ALGT -0.16%), and Spirit Airlines (SAVE -3.22%) -- was holding up well on a down day for broader markets.
So what
It took longer than expected and was weighed down by uncertainty, but the airlines late Tuesday secured $25 billion in payroll support authorized as part of the $2 trillion economic stimulus plan. The industry has been hit hard by the pandemic, which has caused travel demand to evaporate.
The Transportation Security Administration logged 87,534 airline passengers on Tuesday, down from 2,208,688 on the same day a year prior.
Image source: Getty Images.
Spirit Airlines was the only name on the publicly traded list not announced as a recipient of the first tranche of funding, but industry sources say the airline is in negotiations with the government and is expected to be a participant in the program.
These initial funds are the first half of a $50 billion package authorized as part of the bailout bill and were designed to support payroll and ensure no layoffs until Sept. 30 at the earliest. The airlines are also entitled to apply for a portion of the second $25 billion, which will be in the form of loans from the Treasury Department.
Now what
The bailout is not a cure-all, as no company can indefinitely survive having revenue fall 90% year over year. But the package does buy the industry time to wait for the pandemic to be contained and travel to hopefully recover. It's impossible to know when that will happen, but I believe odds are we will see travel return to at least typical recessionary levels by the fall, and therefore it is safe to invest in airline stocks.
Investors should remain cautious, however. This is an industry that has fared poorly in past downturns, and it will likely take years for traffic to return to pre-pandemic levels. For the time being, it is best to stick with the best-run companies, and those with competitive advantages in a downturn. The airlines have turned a corner, but there is still likely to be turbulence ahead.
