What happened

Airlines are in the green on Thursday, a down day for broader markets, as investors are slowly warming to the sector as earnings season continues. The companies are posting losses in the second quarter, as expected, but all appear to have clear plans to ride out the coronavirus pandemic without running out of cash.

Shares of United Airlines Holdings (NASDAQ:UAL) traded up as much as 10.9% mid-day on Thursday, while shares of American Airlines Group (NASDAQ:AAL) peaked at up 9.2%, Spirit Airlines (NYSE:SAVE) gained 7%, and Delta Air Lines (NYSE:DAL) traded up 5.5%. The sector gave back some of those gains as the afternoon went on, but all four airlines were up as of 3:30 p.m. EST, even as the S&P 500 was down more than 1.4%.

So what

Airlines have been hit hard by the pandemic, with travel demand all but evaporating in April and only recovering slightly in the months since. Industry second quarter revenue is down 80% or more year over year, and with new cases spiking in many parts of the country, airlines are planning on shrinking schedules further as summer ends.

Airplanes parked at the airport.

Image source: Getty Images.

Investors know the airlines are going to lose money for at least the next few quarters. The question is, do the companies have the wherewithal to ride out the pandemic without burning through cash reserves? And while nothing is certain, earnings season so far has added to confidence levels that the industry is stronger than initially feared.

United, American, and Spirit all reported earnings in the last 24 hours, and none of them gave any reason for investors to believe the sky is falling.

  • American reported second quarter revenue down 86% year over year, but said it had reduced cash burn to $30 million a day in June from as high as $100 million in April. As importantly, it has $10.2 billion in available liquidity and more money coming in via government loans and other financing.
  • United revenue was down 87% year over year, and the company said it expects cash burn to fall to $25 million per day in the third quarter from $40 million per day in the second quarter. United ended the quarter with $15.2 billion in liquidity, and expects liquidity to grow to $18 billion by the end of the third quarter.
  • Spirit revenue fell 86% year over year, and cash burn is down to $1.5 million per day in June from $9.5 million per day in April. The company, which is much smaller than American or United, ended the quarter with $1.2 billion in liquidity and announced a new 20 million share stock offering on Thursday to boost that total further.

Delta released earnings last week that were well-received by investors, and seems to be getting a fresh lift on Thursday as a new round of earnings reports are digested.

Now what

Bankruptcy still isn't completely off the table, because we don't know how long the pandemic will last or what the economy will look like once it is finally over. The airlines have done good work adding to their cash reserves but no company can survive this environment indefinitely, and even when it is over it will take years to rebuild industry balance sheets bruised by added debt.

At best the industry is facing a multi-year turnaround, with travel demand not expected to return to pre-pandemic levels until 2022 at the earliest.

For those who want to buy in, and are ready to wait out the turbulence, I'd advise buying the most stable companies in the industry. For me that's Delta, Southwest Airlines, and Alaska Air Group, not the names that are flying the highest on Thursday.