What happened
Shares of U.S. airlines are gaining altitude on Tuesday, powered by a number of new datapoints that indicate the industry still has access to capital markets, and is holding up as well as can be expected despite a dramatic drop-off in travel demand. Airlines are far from out of danger, but all indications are that they're weathering the storm.
Shares of Spirit Airlines (SAVE +0.00%) and Alaska Air Group (ALK 3.27%) were both up 10% apiece as of 12:30 p.m. EDT. Shares of United Airlines Holdings (UAL 3.95%), American Air Group (AAL 2.04%), Delta Air Lines (DAL 2.27%), and JetBlue Airways (JBLU 3.17%) were all up more than 5%.
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So what
The airlines headed into first-quarter earnings season with investors focused more on what is going on now than concerned with what happened months ago. The COVID-19 pandemic has caused global travel demand to fall by more than 90%, leading airlines to scramble to cut costs and raising questions about their long-term viability.
Investors have responded by running for the emergency exits, sending shares of these airlines down between 53% and 69% year to date. Revenue has all but dried up, with United, for example, expecting to fly fewer people during the entire month of May 2020 than it did on a single day in May 2019. The question for airlines at this point is whether they have enough cash to hold on until traffic eventually returns.
Investors have received some good news in recent days about airline liquidity, and the industry's ability to raise fresh capital. Delta is reportedly increasing the size of a planned debt offering by $2 billion to $5 billion because it sees robust demand for the notes, and Southwest Airlines (LUV 3.55%) intends to tap debt and equity markets for $2.6 billion in fresh capital.
Southwest also reported earnings on Tuesday, and in its presentation said it expects to bleed through $30 million to $35 million in cash each day during the current quarter. The company had $5.5 billion in cash as of March 31, which leaves time for traffic to recover.
Although Southwest is arguably healthier than most of the other airlines, the entire industry is experiencing this slowdown together, so the company's experiences are relevant to what is going on at other carriers.
Some of the airlines most vulnerable to a downturn are the stocks getting the biggest boosts on Tuesday. Spirit is a niche airline with a significant debt load, and American has the highest debt balance in the industry. JetBlue, meanwhile, has carved out a niche catering to travelers willing to pay higher fares for more amenities. Those travelers could be hard to find in a recession.
Now what
Airlines are priced for disaster today, and to be fair, the industry has a long history of bankruptcies every time the economy turns south. But what is happening due to COVID-19 is unprecedented, and investors have every reason to be frightened.
I believe the airlines can survive without bankruptcies. However, it's likely to be a slow recovery, and air traffic might not return to pre-pandemic levels for three to five years. If so, a lot of sectors are likely to recover before the airlines do.
For those interested in investing in an airline and riding out the turbulence, I'd suggest sticking to top-performing companies. Airlines appear to have levers to pull to remain solvent, but still have a long recovery ahead.
