What happened
Many airline stocks have lost more than half of their value this year, as the COVID-19 pandemic has caused global air travel demand to evaporate and left carriers scrambling to cut costs to survive. The stocks have been trading as if bankruptcies were inevitable.
While the pandemic is far from contained, airline investors in recent days are beginning to gain confidence that the worst-case scenarios that have driven stocks to multiyear lows can be avoided.
Shares of American Airlines Group (AAL 0.42%), United Airlines Holdings (UAL -0.74%), Delta Air Lines (DAL 0.90%), JetBlue Airways (JBLU 1.05%), Hawaiian Holdings (HA -0.53%), and Spirit Airlines (SAVE 12.94%) all climbed more than 10% on Wednesday morning thanks to that growing sense of optimism.
So what
We are in the middle of airline earning season, but there is no real news to tie to any of the carriers that are surging. Instead the move appears tied to an overall improvement in market sentiment, tied to some states taking initial steps to lift COVID-19 pandemic restrictions and begin the process of reopening.
Image source: Getty Images.
The airlines are going to feel the impact of the pandemic for some time to come, with carriers bringing down capacity by upwards of 90% in the second quarter. But that's already priced into the stocks, and thanks to a $50 billion U.S. government bailout, the airlines have ample liquidity to ride out the near-term storm.
Of course, that bailout money will last only so long, and since the government came through with the funds, the focus has been on how long travel demand will remain at depressed levels. The industry came into this downturn relatively healthy, and the airlines should be able to survive at more typical recessionary demand levels, so the United States pushing to normalize would be an important step in the airline industry's recovery.
Airlines year to date data by YCharts
Investors will learn more in the days to come, as American and United will report first-quarter results and discuss their outlooks for the second half of 2020. Based on the results from Delta and Southwest Airlines (LUV 0.37%), the first-quarter losses might be less than anticipated.
Now what
It's hard to get too excited about this rally, because the stocks are still down significantly for the year. But it is worth noting that stocks like United and Spirit were down more than 75% for the year just last month, so it appears market sentiment has at least stabilized for now.
The airlines even in the best-case scenario face a difficult course ahead. Even as flights resume, there could be continued restrictions on international travel, or changes to cabins to promote separation, that could eat into revenue. Overall, it seems likely it will take at least three years, and perhaps upwards of five years, for travel demand to come back to prepandemic levels.
Investors should remain cautious, especially when it comes to airlines more vulnerable in a downturn. For example, American Airlines has the industry's highest debt burden, while Hawaiian has a niche network and high costs due to its emphasis on trans-Pacific flying, and it relies on demand for travel to an expensive destination. Meanwhile JetBlue, before the pandemic, was attempting to attract customers willing to pay more for added amenities, a difficult sale in a recession.
It is going to take a while for this sector, and the stocks, to fully recover, but investors willing to patiently wait out the next few quarters could be richly rewarded. I'd advise sticking to top operators like Delta, Southwest, and Alaska Air Group (ALK 1.32%) instead of buying some of the riskier names.
