What happened
Wall Street is taking a glass-half-full approach on Wednesday, focusing on a continued easing of COVID-19 restrictions and a May jobs number that came in better than expected. There is evidence the economy is bouncing off of its lows, and that is good news for a range of sectors.
Airlines, among the companies hardest hit by the pandemic, are rallying on the hope for normalization. Shares of Spirit Airlines (SAVE +0.00%) soared 14% as of midday, while shares of United Airlines Holdings (UAL +7.22%), American Airlines Group (AAL +4.16%), Delta Air Lines (DAL +2.62%), Southwest Airlines (LUV +5.09%), and JetBlue Airways (JBLU +6.53%), and Alaska Air Group (ALK +10.33%) were all up more than 6% each.
So what
Airlines have been forced to scramble for their survival due to the pandemic, with traffic falling to just a fraction of normal levels and revenue all but drying up. The sector is stable, thanks in part to funds provided by the CARES Act stimulus plan, but if traffic does not return in the months to come, the industry is going to face liquidity issues.
Image source: Getty Images.
Given the current predicament, airline stocks in recent weeks have tended to trade along with the broader day-to-day sentiment on the health of the economy and the pace at which local markets are reopening. On Wednesday, the S&P 500 was up more than 1% on encouraging economic signs, and airlines jumped along with it.
U.S. employers reduced payrolls by about 2.8 million workers in May, but that was significantly better than the 9 million lost jobs economists had expected. And despite civil unrest, major cities including Chicago and New York said they intend to press forward with previous plans to reopen restaurants and other tourist attractions, a potential plus for airlines.
There is some geopolitical news impacting the sector as well. The U.S. Department of Transportation on Wednesday moved to block Chinese airlines from flying into the United States in response to China's failure to let United and Delta resume flights this week.
Although geopolitical tension is never good for business, the airlines are primarily focused on domestic travel for now. The loss of flying rights to China will cost some revenue, particularly in cargo. But there's plenty of time for the issues to be resolved as many expect it to take years before international service is ramped up to anything near pre-pandemic levels.
Now what
The news flow is optimistic, and the move higher by airline stocks makes sense. But investors should be warned there is still a lot that can go wrong from here.
We'll see in the coming weeks whether the reopening of cities, or the civil unrest, will lead to a second wave of the pandemic, and if so, how travelers and government officials will react. Even if all goes well and there is no second wave, the U.S. economy is likely to need time to recover.
Given the uncertainty, it is wise for investors who want to buy into this rally to focus on top operators. With each passing day, the chances of the airlines surviving the COVID-19 crisis are rising, but there are still a lot of reasons for concern about the sector.
