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Why Airline Shares Are Falling Today

By Lou Whiteman – Jun 24, 2020 at 12:25PM

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Evidence is mounting that COVID-19 is regaining the upper hand in key tourism markets.

What happened

Airline shares are under pressure on Wednesday, caught in a broader market move downward due to growing fears that a surge in new COVID-19 cases will force another round of shutdowns.

Shares of Spirit Airlines (SAVE -4.24%) were down 11% as of noon EDT, while shares of United Airlines Holdings (UAL -4.01%), Delta Air Lines (DAL -3.14%), and JetBlue Airways (JBLU -2.68%) were down 8% apiece. Shares of other carriers including American Airlines Group (AAL -3.93%), Southwest Airlines (LUV -2.88%)Hawaiian Holdings (HA -4.71%)Alaska Air Group (ALK -2.63%), and Allegiant Travel (ALGT -5.30%) were all down 5% or more. 

So what

Airline balance sheets have been devastated by the pandemic, which has caused travel demand to evaporate and starved the industry of revenue. The shares have regained some of their altitude in recent weeks on growing hopes that the worst of the pandemic is now behind us, but that optimism is seemingly diminishing by the day.

A plane flies above the clouds.

Image source: Getty Images.

Popular tourism destinations including California, Texas, Florida, and Arizona are seeing spikes in new cases, and some cities are considering reversing plans to reopen and instead putting new restrictions in place. That would threaten the nascent recovery, and in the worst case send demand back to March and April lows. Airlines saw daily business down 90% or more year over year in those months.

Among the reports weighing on investor sentiment on Tuesday was a decision by the governors of New York, Connecticut, and New Jersey to impose travel restrictions on visitors from Florida and other high-infection states. Also, workers at Disney parks in Florida are reportedly petitioning to delay reopening due to the surge in new cases. Those headlines are all bearish for travel demand.

Now what

The good news, if there is good news, is the airlines are not going to be caught flat-footed by a second wave. The industry has raised nearly $40 billion in private debt and equity capital in addition to up to $50 billion in government assistance. Just this week, both American and United have raised billions in additional liquidity.

The goal for the airlines is to have enough cash in the bank to outlast the pandemic and its economic ramifications, no matter how long it takes. The industry has cut flights and is likely to start shedding workers this fall if demand does not return. But no airline can survive indefinitely without revenue coming in.

For investors who believe that the worst-case scenarios will not materialize and there will be a gradual recovery, the stocks -- trading at less than 0.5 times normalized revenue -- are inexpensive. But given the risk and the uncertainty, it's best to focus on the top operators in the industry, which have the wherewithal to outlast their rivals if there is a prolonged downturn.

Lou Whiteman owns shares of Delta Air Lines, Spirit Airlines, and Walt Disney. The Motley Fool owns shares of and recommends Spirit Airlines and Walt Disney. The Motley Fool recommends Alaska Air Group, Delta Air Lines, Hawaiian Holdings, JetBlue Airways, and Southwest Airlines and recommends the following options: long January 2021 $60 calls on Walt Disney and short July 2020 $115 calls on Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Alaska Air Group, Inc. Stock Quote
Alaska Air Group, Inc.
ALK
$40.78 (-2.63%) $-1.10
JetBlue Airways Corporation Stock Quote
JetBlue Airways Corporation
JBLU
$6.91 (-2.68%) $0.19
Southwest Airlines Co. Stock Quote
Southwest Airlines Co.
LUV
$32.05 (-2.88%) $0.95
Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
DAL
$29.02 (-3.14%) $0.94
Spirit Airlines, Inc. Stock Quote
Spirit Airlines, Inc.
SAVE
$21.48 (-4.24%) $0.95
United Airlines Holdings, Inc. Stock Quote
United Airlines Holdings, Inc.
UAL
$33.07 (-4.01%) $-1.38
Hawaiian Holdings, Inc. Stock Quote
Hawaiian Holdings, Inc.
HA
$13.36 (-4.71%) $0.66
Allegiant Travel Company Stock Quote
Allegiant Travel Company
ALGT
$80.28 (-5.30%) $-4.49
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
AAL
$12.21 (-3.93%) $0.50

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

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