What happened
Airline shares got a lift Tuesday along with the broader markets on encouraging news about a treatment for COVID-19 and a renewed effort by the Federal Reserve to stimulate the economy. Airlines need a recovery, and with it a rebound in travel demand, to weather the pandemic crisis, and the headlines on Tuesday were positive steps in that direction.
Shares of Spirit Airlines (SAVE -4.71%) opened up 13.8% on Tuesday, while shares of American Airlines Group (AAL -1.41%) and United Airlines Holdings (UAL 0.27%) each were up 10% and shares of Delta Air Lines (DAL 0.79%), Southwest Airlines (LUV -0.81%), JetBlue Airways (JBLU -15.18%), Alaska Air Group (ALK 0.75%), Hawaiian Holdings (HA -0.73%), and Allegiant Travel (ALGT 0.29%) were all up more than 6%.
The stocks gave back some of those gains after the open, but the entire sector was still beating the market as of 11 a.m. EDT Tuesday.
Image source: Getty Images.
So what
The airline business has been devastated by the pandemic, with travel demand falling more than 90% year over year at the height of the pandemic in March and April. It now appears that was a bottom, but the recovery will be slow and, given COVID-19 infection rates are still rising in some parts of the country, perilous.
The airlines have cash to survive well into the Fall, but at some point travel demand has to return for the industry to avoid bankruptcy filings. That's likely going to require a combination of a lessening of the COVID-19 risk, and government efforts to make sure the pandemic-related slowdown does not lead to a long recession.
The markets were up on Tuesday on positive news on both fronts. England's top medical officer said on Twitter that a study finding a common steroid drug dexamethasone is effective in treating the coronavirus is "the most important trial result for COVID-19 so far."
This is the most important trial result for COVID-19 so far. Significiant reduction in mortality in those requiring oxygen or ventilation from a widely available, safe and well known drug. Many thanks to those who took part and made it happen. It will save lives around the world. https://t.co/zRIaHulHOe
— Professor Chris Whitty (@CMO_England) June 16, 2020
On the economic front, the Federal Reserve late Monday announced it would be expanding its stimulus program by purchasing individual corporate bonds. The effectiveness of that form of stimulus is open to debate, but investors tend to cheer any indication that the government is devoting all available resources to avoiding a recession.
Airlines are also doing what they can to encourage people to fly. A leading U.S. trade group on Tuesday announced a new, tougher enforcement policy to make sure everyone on board flights are wearing masks. United, a member of that trade group, said it intends to at least temporarily ban any traveler who refuses to comply with the mask order.
Now what
For the last few weeks now, the airlines have been trading up and down along with broader market sentiment about the health of the economy and the outlook for the pandemic. We're still in a dangerous period, with case numbers growing in tourist hotspots including Florida and California, and talk of imposing new stay-at-home orders in certain urban areas like Houston.
If medical researchers are making progress in treating COVID-19, and if the Fed can succeed in propping up the economy until such time that it is safe to resume normal activities, the airlines appear significantly undervalued even after Tuesday's rally. But given the risks, investors should limit themselves to small positions, brace for further volatility, and stick to top operators with the most resources to weather an extended downturn.
