After a brief rally Latin American airlines are now back on the descent, as growing fears of a second wave of the pandemic are outweighing optimism that the worst of the initial wave is now behind us.
Shares of Brazilian airline Azul (NYSE:AZUL) are down more than 20% heading into the close, with shares of domestic rival Gol Linhas Aereas Inteligentes (NYSE:GOL) off 16%. Copa Holdings (NYSE:CPA) of Panama was down 11%, as was Mexican airport operator Grupo Aeroportuario del Pacifico (NYSE:PAC).
COVID-19 has hit the global airline business hard, pushing travel demand down to near-zero and forcing airlines to scramble to cut costs, raise cash, and ride out the storm. Latin American airlines have been hit particularly hard because of their reliance on international travel, which has fallen more than domestic demand and is likely to be complicated for months to come as different nations impose different restrictions.
Two large Latin American airlines, Latam Airlines Group of Chile and Avianca Holdings of Colombia, have filed for bankruptcy protection. And for a while investors assumed it was inevitable for others as well. Gol, Azul, and Copa shares all lost more than 70% of their value between mid-February and mid-March.
Just as in the U.S., parts of South America are beginning to reopen. Shares of both Gol and Azul doubled in the first week of June on news that Brazil's Rio de Janeiro was allowing restaurants and tourist destinations to reopen. Copa, which has been the steadiest of all Latin American airline stocks through the crisis thanks to its relatively pristine balance sheet, has also gotten a lift in recent days.
Similarly, Grupo Aeroportuario owns and operates a number of airports in Mexico and Jamaica and relies on aircraft volumes for its revenue. The company, whose shares have held up slightly better than the airlines, is well-positioned to survive the downturn, but there is little chance revenue and earnings can soar absent an aviation recovery.
Over the past several days investors have switched their focus away from what is beginning to go right for airlines back to what could go wrong, homing in on data that suggests cases are on the rise in many U.S. tourist-focused states. New cases are also on the rise in Brazil, Mexico, and elsewhere in Latin America, and with them comes added risk.
As these stocks trade on the U.S. exchange, they tend to be influenced by U.S. investor sentiment toward airlines. On Thursday, a bad day for the broader markets, that sentiment led to a sell-off in airline stocks.
These stocks have taken investors on a turbulent ride so far this year, and even as sentiment was improving off of the lows, there was reason to worry if the rally was sustainable. A pandemic is hard to predict, and until we know exactly how and when the outbreak is contained, and whether there is a second wave, it'is impossible to say for sure whether any airline has enough cash in the bank to survive.
Investors with a high risk tolerance who are interested in buying in and hoping for the best should limit themselves to a small portion of their overall portfolio, and watch balance sheets carefully. Among the airline stocks discussed here, I think Copa, with net debt totaling just 1.66 times EBITDA, is a better bet than Gol (21.4 times) or Azul (15.6 times).