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Why Airline Shares Are Soaring Today

By Lou Whiteman - May 18, 2020 at 2:43PM

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Stocks are rallying on reports of progress in the fight against COVID-19.

What happened

We've been saying for weeks now that airlines, thanks in part to a government cash infusion, are in no immediate danger of liquidity issues, but the industry needs traffic to normalize in the months to come to avoid dire consequences. Monday brought promising news on the vaccine front, and that's helping to push airline stocks, and the broader market, higher.

Shares of Spirit Airlines (SAVE 2.98%) are up 21% as of noon Monday, while shares of United Airlines Holdings (UAL 2.88%) are up 17%, and shares of Allegiant Travel (ALGT 2.05%), Delta Air Lines (DAL 1.90%), Southwest Airlines (LUV 1.69%), and Hawaiian Holdings (HA 2.38%) are up more than 11% apiece.

Other airline stocks are also beating the market, with Alaska Air Group (ALK 2.80%) up 10%, American Airlines Group (AAL 3.55%) up 8%, and JetBlue Airways (JBLU 1.91%) up more than 6%.

So what

The COVID-19 pandemic has wiped out demand for air travel, causing airline stocks to lose more than half of their value year to date and raising real questions about the industry's future.

The airlines came into the crisis relatively healthy and have added cash in the months since the pandemic began, giving them some cushion. But it will be difficult for the stocks to take off with so much uncertainty remaining about the duration of the pandemic and what the economy will look like when it is over.

An airplane taking off.

Image source: Getty Images.

The market on Monday cheered positive news from biotech Moderna (MRNA 4.97%) about promising early results from a clinical trial of a potential COVID-19 vaccine. The best-case scenario for airlines would be for a vaccine to be rapidly developed, allowing travel to normalize quickly and revenues to return.

There is some company-specific news driving certain stocks on Monday as well. Before markets opened, Spirit Airlines was upgraded to outperform by Evercore ISI, and Delta announced it was resuming some key international routes suspended due to the pandemic.

United, meanwhile, had been beaten down harder than most last week due to a number of company-specific headlines and was due for a rebound. JetBlue, due to its business model, will likely need more of a full economic recovery, and not just normalized recession-level traffic, to really rebound.

Now what

Moderna's clinical trial is without doubt good news, but it is only the first step in a long process. The trial was only conducted on eight participants, and further research is needed. The company hopes to begin a larger study in July.

If there is an end to the pandemic in sight, airline stocks are almost certainly undervalued and buying in makes sense. But be aware that even in the best of scenarios we are still months away from a widespread vaccine that could allow travel to normalize. And we still don't know what the U.S. economy will look like in the second half of the year, and what that will mean for travel trends.

I believe it is safe to buy airline stocks right now, as long as investors understand the risk. It's best to stick to top operators like Delta, Alaska, and Southwest that have the best chance of surviving in the event something goes wrong in the vaccine chase and the pandemic is with us longer than we hope.

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Stocks Mentioned

Alaska Air Group, Inc. Stock Quote
Alaska Air Group, Inc.
$41.17 (2.80%) $1.12
JetBlue Airways Corporation Stock Quote
JetBlue Airways Corporation
$8.53 (1.91%) $0.16
Southwest Airlines Co. Stock Quote
Southwest Airlines Co.
$36.73 (1.69%) $0.61
Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
$29.52 (1.90%) $0.55
Spirit Airlines, Inc. Stock Quote
Spirit Airlines, Inc.
$24.55 (2.98%) $0.71
United Airlines Holdings, Inc. Stock Quote
United Airlines Holdings, Inc.
$36.44 (2.88%) $1.02
Hawaiian Holdings, Inc. Stock Quote
Hawaiian Holdings, Inc.
$14.65 (2.38%) $0.34
Allegiant Travel Company Stock Quote
Allegiant Travel Company
$115.41 (2.05%) $2.32
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
$13.13 (3.55%) $0.45
Moderna, Inc. Stock Quote
Moderna, Inc.
$149.95 (4.97%) $7.10

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

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