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Why Airline Stocks Are Up Today

By Lou Whiteman – Apr 17, 2020 at 2:21PM

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Optimistic pandemic headlines offer airline investors reason for hope.

What happened

Markets jumped on Friday on news of progress treating COVID-19 and talk of soon reopening the economy, and airline stocks joined the surge higher. Airlines have been hit hard by the pandemic, and the industry needs a rapid recovery to avoid further downsizing.

Shares of American Airlines Group (AAL -2.87%), Hawaiian Holdings (HA -1.65%), and Spirit Airlines (SAVE -3.31%), three companies that are arguably the airlines most in need of a quick recovery, all were up 8% at the opening, while shares of Delta Air Lines (DAL -3.45%), United Airlines Holdings (UAL -3.54%), Southwest Airlines (LUV -2.12%), Alaska Air Group (ALK -4.83%), JetBlue Airways (JBLU -4.05%), and Allegiant Travel (ALGT -5.41%) all gained more than 5%.

The stocks gave back some of those gains by midday, but all were still easily outperforming the S&P 500.

So what

The airline industry has seen a lot of disruption in just the past two months, with the pandemic all but eliminating travel demand and causing companies to cut schedules, ground planes, and seek other ways to reduce costs.

The government came through with $50 billion in stimulus funding designed to keep employees on the payroll and buy the industry time for a recovery, but the fate of at least some of these carriers is going to come down to how quickly that recovery happens.

A traveler wearing a mask walks through an airport terminal.

Image source: Getty Images.

The airlines got good news on that front on Friday, as policymakers began to discuss the parameters needed to begin reopening businesses and lifting shelter-in-place orders. It's likely to take time for the economic recovery to begin, and expect the response to be staggered across the nation. But the discussions at least offer some amount of hope that normal activity might soon be allowed to resume.

Airlines for now are holding off on layoffs, one of the conditions attached to the bailout bill. But the companies are concerned that drastic actions might have to be taken once the bailout-imposed restrictions expire at the end of September.

United execs have warned employees that they expect "our airline, and our overall workforce, to be smaller than it is today." And Southwest, which famously was able to avoid layoffs following the attacks of Sept. 11, has reportedly begun discussions with union leaders on potential cuts in the fall.

American is widely seen as the major airline most vulnerable to a prolonged slump due to its industry-high debt load, while Hawaiian with its niche network and reliance on high-cost trans-Pacific flying is ill suited for an extended downturn. Spirit to date is the only major airline not to receive bailout funds, although it is said to be in discussions for them.

Now what

The tone of Friday's headlines is undeniably more positive than in recent days, but it is important that airline investors not get ahead of themselves. I'm optimistic the industry can weather the storm ahead, but airlines are unlikely to see a quick recovery.

Even if the worst of the pandemic is soon behind us and businesses begin to reopen, the U.S. economy is probably already in a recession or will soon fall into one. Air traffic demand is likely to be muted through the remainder of 2020 at a minimum, and I believe it will take at least two years, if not longer, for the industry to recover to pre-pandemic levels.

There's no rush to buy into these shares, and if investors do want to buy in and wait out a recovery, they should stick to top operators like Delta and Southwest. Today's headlines offer reason for hope, but the journey ahead is still likely to include significant turbulence.

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.
$38.81 (-4.83%) $-1.97
JetBlue Airways Corporation Stock Quote
JetBlue Airways Corporation
$6.63 (-4.05%) $0.28
Southwest Airlines Co. Stock Quote
Southwest Airlines Co.
$31.37 (-2.12%) $0.68
Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
$28.02 (-3.45%) $-1.00
Spirit Airlines, Inc. Stock Quote
Spirit Airlines, Inc.
$20.77 (-3.31%) $0.71
United Airlines Holdings, Inc. Stock Quote
United Airlines Holdings, Inc.
$31.90 (-3.54%) $-1.17
Hawaiian Holdings, Inc. Stock Quote
Hawaiian Holdings, Inc.
$13.14 (-1.65%) $0.22
Allegiant Travel Company Stock Quote
Allegiant Travel Company
$75.94 (-5.41%) $-4.34
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
$11.86 (-2.87%) $0.35

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

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