A brief early June rally in airline stocks, suggesting that the worst of the COVID-19 pandemic might be behind us, faded quickly Thursday. It was a rough day for broader markets, and as airline stocks fell, they brought a lot of their key suppliers down with them.
The pandemic has depressed demand for travel, forcing airlines to cut flights and ground airplanes. The cuts are rippling through supply chains, putting pressure on shares of aircraft manufacturers like Boeing, Airbus, and Embraer, as well as a number of suppliers to the industry, including Triumph, Textron, and TransDigm.
In early June, both the airlines and their suppliers were rallying on efforts by the carriers to bring back parts of their schedule later in the summer. But that optimism has quickly faded this week, with investors focused on reports of rising COVID-19 cases in a number of U.S. states.
If we are nearing a second wave of the pandemic, that's bad news for the airlines and will likely mean it will take more time than expected for the carriers to recover and start buying new planes and spare parts again. Textron carries extra risk as it makes Cessna business jets and other small planes that are typically hard to sell during an economic downturn.
There was also company-specific news pressuring TransDigm and Triumph on Thursday. Spirit AeroSystems said late Wednesday it has been asked to scale back production of parts for Boeing's 737 Max. That would appear to indicate Boeing is uncertain about production rates, a risk to all companies that make parts for Boeing jets.
It's going to be hard for these stocks to take off without the airlines, and the airlines are likely to remain grounded until there is more certainty around the pandemic. Until more is known, commercial aerospace investors are unlikely to outperform the broader markets.
For those interested in buying into commercial aerospace now, I'd recommend focusing on stocks like TransDigm that have oversize exposure to the aftermarket business in spare parts, as airlines are likely to bring existing planes back before buying new ones.
Textron is also intriguing due to its revenue diversity, making everything from business jets to golf carts to military equipment. But it's hard to see a near-term catalyst in any of those businesses to get the shares moving higher.