Please ensure Javascript is enabled for purposes of website accessibility

Why Airline Shares Are Falling Today

By Lou Whiteman – May 1, 2020 at 11:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

United joins the parade of carriers posting massive first-quarter losses.

What happened

Airline shares were under pressure Friday following United Airlines Holdings' (UAL 7.68%) first-quarter earnings release, providing fresh evidence of the damage done to the industry by the COVID-19 pandemic.

Shares of United and American Airlines Group (AAL 8.64%) led the sector lower on Friday, each down 7% apiece. Shares of other carriers, including Delta Air Lines (DAL 8.81%), Southwest Airlines (LUV 6.31%), Alaska Air Group (ALK 6.87%), JetBlue Airways (JBLU 8.28%), Hawaiian Holdings (HA 7.71%), Spirit Airlines (SAVE 3.54%), and Allegiant Travel (ALGT 8.81%) were all also down more than 5%.

The stocks clawed back some of their initial declines as the morning continued, but it appears it is going to be another difficult day for airline stocks.

So what

After markets closed Thursday, United reported an adjusted loss of $2.57 per share on revenue of $7.98 billion, compared to analyst expectations of a $3.47-per-share loss on revenue of $8.22 billion. Revenue was down 16.8% year over year, and the company's operating margin fell to -12.2% from 5.2% in the first quarter of 2019.

Investors knew going into earnings season that the first quarter would be bad for airlines and the second quarter would be worse. United was hit particularly hard in the early days of the pandemic because it has the most exposure to Asia among any carrier based in the mainland U.S.

A traveler walking through an airport with a mask on.

Image source: Getty Images.

"We have been at the forefront of warning how deep of an impact we expect this crisis could have and how long we expect it could last," CEO Oscar Munoz said in a statement. "While we are still in the midst of this crisis, we will not hesitate to make difficult decisions we believe will ensure the long-term success of our company."

United's total liquidity as of close of business April 29 was $9.6 billion, including $2 billion in undrawn funds under its revolving credit facility. The airline said it expects to burn though about $40 million to $45 million in cash per day in the second quarter.

The question for now is how long travel demand, and with it airline revenue, will remain depressed. The industry has billions in liquidity and access to additional funds, but no amount of capital will be enough if traffic does not return in the months to come.

Delta appears likely to have the resources to survive, and United seems pretty well positioned for an extended downturn, but at least one Wall Street analyst is growing worried about American. Evercore ISI analyst Duane Pfennigwerth in a research note out Friday lowered his price target on American to $1 from $10, saying that American has the weakest balance sheet among the airlines.

Now what

Although there is news on only a couple of airlines on Friday morning, no company is immune to the impact of the COVID-19 pandemic, and the sector stocks for weeks now have tended to trade together.

American has the most debt, but it is far from the only airline vulnerable to an extended downturn. Hawaiian has a niche network heavy on expensive transpacific flying and is reliant on consumers committing to expensive vacations. Spirit has significant debt, too, and is having a hard time meeting the U.S. government requirements to receive bailout funds. JetBlue came into the pandemic in the early stages of a transformation, and its model -- offering premium service for a higher price -- might not play well if the U.S., as expected, falls into a recession.

The airlines did come into this crisis healthier than at any point in recent history, and I am hopeful they all have the wherewithal to survive without bankruptcy filings. But until we have more clarity about how long the pandemic will last, and what the postvirus economy will look like, it is going to be hard for these shares to find a bottom.

For now, investors who want to take a risk and buy into the industry should focus on top names only. I'd recommend Delta, Southwest, and Alaska, in that order.

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Alaska Air Group, Inc. Stock Quote
Alaska Air Group, Inc.
$42.65 (6.87%) $2.74
JetBlue Airways Corporation Stock Quote
JetBlue Airways Corporation
$7.19 (8.28%) $0.55
Southwest Airlines Co. Stock Quote
Southwest Airlines Co.
$33.19 (6.31%) $1.97
Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
$30.75 (8.81%) $2.49
Spirit Airlines, Inc. Stock Quote
Spirit Airlines, Inc.
$20.17 (3.54%) $0.69
United Airlines Holdings, Inc. Stock Quote
United Airlines Holdings, Inc.
$35.33 (7.68%) $2.52
Hawaiian Holdings, Inc. Stock Quote
Hawaiian Holdings, Inc.
$14.25 (7.71%) $1.02
Allegiant Travel Company Stock Quote
Allegiant Travel Company
$80.87 (8.81%) $6.55
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
$12.95 (8.64%) $1.03

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.