Please ensure Javascript is enabled for purposes of website accessibility

Why Shares of Latam and Other South American Airlines Are Soaring Today

By Lou Whiteman – Jun 3, 2020 at 12:16PM

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

The continent is beginning to reopen, but significant risks still remain.

What happened

Latin America is slowly reopening for business after lockdowns due to the COVID-19 pandemic, with popular tourist destination Rio de Janeiro in Brazil allowing nonessential businesses including restaurants and shops to return to normal operations.

As markets reopen, South American airline stocks that had lost more than half of their value due to the pandemic are feeling rejuvenated as well. Brazilian airlines Azul (AZUL -9.35%) and Gol Linhas Aereas Inteligentes (GOL -8.52%) each traded up more than 16% on Wednesday morning, and Chile's Latam Airlines Group (NYSE: LTM) soared 28% higher.

So what

Airlines around the globe have been hit hard by the pandemic, and Latin American airlines in particular have suffered due to bans on international travel. Latam and Colombia's Avianca Holdings have both filed for bankruptcy, and investors have been worried that other carriers, including Azul and Gol, would suffer the same fate.

A ground worker directs a plane to the terminal.

Image source: Getty Images.

The outlook for the sector, however, is improving as governments take initial steps to restart their economies. Rio de Janeiro is reopening tourist attractions and related businesses as a first step toward ending pandemic-related shutdowns. If all goes well, expect other major markets to follow.

Although Latam is up the most on Wednesday, it is also the stock with the most risk attached to it. The company filed for bankruptcy protection in New York and is now attempting to reorganize and eliminate some of its debt. Those debt holders are in front of equity holders in a bankruptcy, and it is likely that current shareholders will eventually be wiped out if and when the airline eventually emerges from bankruptcy protection.

Now what

There's plenty of reason to be skeptical about this rally. First, Brazil is taking steps to reopen even though COVID-19 cases are still on the rise. Hopefully, there will not be a second wave of the pandemic, but if there is one, whatever progress is being made today in reopening the economy is likely to quickly reverse.

And while the most important thing for the airlines is to get travelers flying again and revenue coming through the door, the Latam bankruptcy has complicated efforts by Brazil to provide financial assistance to other airlines. Reuters reports that a potential airline bailout bill is delayed until at least July due to the filing, which would affect not just Latam Brasil but also aid for Gol and Azul.

Long-term-focused investors should at best only take small, speculative positions in Gol and Azul, and should avoid Latam altogether. A recovery may be at hand, but it still looks like a turbulent ride ahead for these airline stocks.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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

Gol Linhas Aéreas Inteligentes S.A. Stock Quote
Gol Linhas Aéreas Inteligentes S.A.
GOL
$3.65 (-8.52%) $0.34
Azul S.A. Stock Quote
Azul S.A.
AZUL
$9.21 (-9.35%) $0.95

*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
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/26/2022.

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.