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Why Latin American Airline Stocks Are Up Today

By Lou Whiteman – Jun 5, 2020 at 4:29PM

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The region is reopening, for better or for worse.

What happened

Latin America is beginning to reopen after the COVID-19 pandemic. That, coupled with a surge in U.S. airline shares on improving domestic travel trends, has investors focused on buying into Latin American airlines.

Shares of Brazilian airlines Azul (AZUL 1.62%) and Gol Linhas Aereas Inteligentes (GOL 4.44%) each closed up 14% on Friday, while shares of Mexico's Controladora Vuela Compania de Aviacion, or Volaris (VLRS -4.64%), closed up 10%.

So what

Airline stocks around the globe have plunged due to the pandemic, which has caused travel demand to all but evaporate. Latin American airlines have seen their traffic impacted far more than most, as they are more reliant on international travel than their U.S. counterparts.

Airplanes parked at an airport terminal.

Image source: Getty Images.

The region has seen two of the largest airline bankruptcies year to date, with Colombia's Avianca Holdings and Chile's Latam Airlines Group both flying into Chapter 11 protection in the U.S., and shares of Azul, Gol, and Volaris all lost close to 70% of their value at one point in 2020 on fears they could be forced to join them.

The airlines are still troubled, but recent news has provided a tailwind for the industry. Brazil is beginning to wind down shelter-in-place orders, starting with tourist hotbed Rio de Janeiro, and Mexico president Andres Manuel Lopez Obrador said it was time to restart tourism "for the good of the people."

Investors in these New York-traded shares are buying in likely fully aware of what has happened in the U.S. as state economies have begun to open. Security screeners working for the U.S. Transportation Security Administration had their busiest day since March 22 on Thursday, indicating that at least in the U.S. there is pent-up demand for travel as restrictions are lifted.

Now what

It feels premature to call the pandemic over, either in the U.S. or elsewhere. In Brazil and Mexico, the restrictions are being lifted despite new COVID-19 cases continuing to rise.

Some of this rally is likely based on growing investor confidence that these airlines can avoid the fate of Avianca and Latam and stay out of bankruptcy. That's a positive, but we are still a long way away from getting back to normal. Rising COVID-19 cases make the situation all the more uncertain in Latin America.

Investors need to be aware that volatility, like the pandemic, is likely not over yet.

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.

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Stocks Mentioned

Gol Linhas Aéreas Inteligentes S.A. Stock Quote
Gol Linhas Aéreas Inteligentes S.A.
GOL
$3.29 (4.44%) $0.14
Controladora Vuela Compania de Aviacion, S.A.B. de C.V. Stock Quote
Controladora Vuela Compania de Aviacion, S.A.B. de C.V.
VLRS
$6.99 (-4.64%) $0.34
Azul S.A. Stock Quote
Azul S.A.
AZUL
$8.14 (1.62%) $0.13

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

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