What happened
A wave of euphoria is sweeping through the airline sector as investors react to some positive signs suggesting a recovery is at hand.
Shares of American Airlines Group (AAL -2.06%) led the sector higher for the second straight day, up more than 20% at 11 a.m. EDT, but the rally was widespread. Shares of United Airlines Holdings (UAL 0.17%), Spirit Airlines (SAVE -3.07%), and JetBlue Airways (JBLU -18.77%) were up double-digits, and Delta Air Lines (DAL 0.43%), Southwest Airlines (LUV -0.91%), Hawaiian Holdings (HA -0.54%), Alaska Air Group (ALK -0.99%), and Allegiant Travel (ALGT -0.93%) gained more than 4% apiece.
So what
Airline stocks were hit hard by the COVID-19 pandemic, with travel demand falling more than 90% and revenue all but evaporating. The airlines responded by raising liquidity, in part thanks to the CARES Act government stimulus plan, but unless demand for travel returns, the carriers are going to eventually face liquidity issues.
Image source: American Airlines.
In recent days, we've seen indications that the worst might be behind us. On Thursday, American said it was restoring a significant number of flights as travel interest has returned. The airline said it averaged 110,330 passengers per day in the last week of May, more than triple the 32,154 daily passenger average for April.
The Transportation Security Administration said Friday that Thursday was the busiest day for airline security screeners since March 22, handling 391,882 travelers. A better-than-expected jobs report also gave a lift to the broader markets, as it was viewed as a sign the economy is beginning to recover.
Now what
It appears we are in the early stages of a recovery, but the emphasis is on "early stages." American is bringing back flights but will still only fly about 55% of its July 2019 capacity. TSA screening numbers are improving, but the agency screened 2,634,947 passengers on June 5, 2019, meaning traffic is still down 85% year over year.
At best, we are still looking at a multiyear recovery, and airline balance sheets will be bruised from the debt they have taken on to survive the crisis for years to come. At worst, there's still a risk that a second wave of the pandemic will hit later this year, and the industry will be right back at square one if it does.
Even after this week's rally, airline stocks are still down between 22% and 48% year to date. The valuations remain attractive, and there's enough reason for optimism to justify investors buying in. But given the risks that remain, it's best to stick to small, speculative positions and to focus on the industry's top performers.
As we've learned this week, momentum and sentiment can change quickly.
