Please ensure Javascript is enabled for purposes of website accessibility

Why Airline Shares Are Up Today

By Lou Whiteman – Jun 29, 2020 at 4:03PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Goldman Sachs is optimistic about the airlines.

What happened

Airline shares soared higher on Monday after a prominent Wall Street analyst came out with a bullish report on the sector. It's a "risk on" day on Wall Street, with broader markets brushing off spikes in COVID-19 cases and focusing on economic data. Airline shares are going along for the ride.

Shares of Southwest Airlines (LUV 1.76%) are leading the sector higher, up 10% as of 2:30 p.m. EST, while shares of American Airlines Group (AAL 2.24%) and Spirit Airlines (SAVE -0.28%) are both up 8% apiece. United Airlines Holdings (UAL 1.56%), Delta Air Lines (DAL 2.19%), JetBlue Airways (JBLU 0.91%), Alaska Air Group (ALK 1.86%), and Hawaiian Holdings (HA 0.44%) are all up more than 6%.

So what

Airlines have been hit hard by the pandemic. The industry expecting second-quarter revenue to fall 90% year over year. We've seen the early signs of a recovery in travel demand, but the industry is still vulnerable as new cases soar in Florida, Texas, California, and other key tourist destinations.

But Goldman Sachs analyst Catherine O'Brien is feeling more confident the airlines can survive the downturn, issuing a double upgrade of Southwest and raising her price target on a number of other airlines. O'Brien in a note wrote that passenger volumes are rising off of April lows, and there appears to be pent-up demand for air travel.

An airplane taking off.

Image source: Getty Images.

Traffic volumes remain well off last year's levels, but O'Brien notes airlines have made steady progress bringing down cash burn rates to better survive the downturn. The analyst raised her price target on Alaska Air to $63 from $51, Delta to $38 from $33, United to $61 from $40, Spirit to $20 from $15, and JetBlue to $17 from $12.

There wasn't much good news concerning new COVID-19 cases over the weekend, with the numbers continuing to spike in a number of states. But Monday did bring positive economic data that provided markets reason for hope. Pending home sales climbed much faster than expected, a hopeful sign that the pandemic has not brought the economy to a grinding halt.

Boeing also got a lift as its grounded 737 Max took flight Monday for a recertification flight. While airlines remain in survival mode and aren't clamoring for new deliveries, a number of the largest U.S. airlines have 737 Max planes on order. Getting the plane back in service is important to the long-term future of the industry.

Now what

Back in March, when the pandemic battered markets, the fear among investors was that the crisis would force a number of airlines into bankruptcy. Thanks to the airlines' success in raising both private funds and government assistance, that fear has diminished, but the airlines still face a rough patch up ahead.

Even in the best-case scenario, it's going to take years for schedules to fully recover to pre-pandemic levels. The airlines are prohibited from doing layoffs through Sept. 30 as a condition for receiving government assistance but appear likely to reduce headcount this fall. This will be a smaller industry for the foreseeable future.

If the pandemic does force another round of closures around the U.S., that timeline could be stretched out even further. For those with a long time horizon and a tolerance for risk, I think it's safe to buy into airline stocks, but keep the sector as a small part of a large, diverse portfolio and focus on top names with the strongest businesses.

Lou Whiteman owns shares of Delta Air Lines and Spirit Airlines. The Motley Fool owns shares of and recommends Spirit Airlines. The Motley Fool recommends Alaska Air Group, Delta Air Lines, Hawaiian Holdings, JetBlue Airways, and Southwest Airlines. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.