Thursday was a good day for airline stocks, and American Airlines Group (AAL 0.37%) led the sector higher. American closed up 3.8%, and traded up as much as 5.8% mid-day, on a loosening of international travel restrictions and continued hope airlines might be included in a second round of stimulus coming out of Washington.
It's been a tough year for the airline industry, with COVID-19 squelching travel demand and causing companies to scramble to cut costs. The airlines saw revenue in the second quarter fall by 80% or more year over year, in part because the U.S. and other nations limited international travel to try to stem the spread of the virus.
COVID-19 is still a problem, but some of those regulations are beginning to be rolled back. The U.S. State Department on Thursday lifted its Global Level 4 Health Advisory warning U.S. citizens to avoid all international travel.
The change in designation is unlikely to open a demand floodgate, as U.S. citizens are still limited in the international destinations they can travel to due to the country's continued issues with the pandemic. Most large corporations are limiting employee travel, especially international travel, and few tourists are likely to venture out in the current environment.
Still, the move is a step in the right direction.
Airlines are also moving higher on fresh talk that lawmakers are open to including another round of payroll support in a second stimulus plan. As part of the CARES Act passed earlier this year the airlines received $25 billion in grants and loans to help cover payroll during the pandemic, conditioned on the industry conducting no layoffs before Sept. 30.
Airline shares spiked higher on Wednesday after a group of Republican senators reportedly backed extending an additional $25 billion in support to airlines in return for extending the layoff ban. Later that day President Donald Trump expressed support for the new stimulus.
The news has all airlines in the green, but American likely led the way because it is considered the most vulnerable among major carriers due to its industry-high debt load. American was also the most aggressive in using the payroll support to add back flights and try to capture whatever revenue was out there to be had.
There is a lot of positive news concerning the airlines right now, but investors need to be cautious not to get ahead of themselves. This downturn is going to be a long one, with the industry expecting flight schedules to return to pre-pandemic levels by 2022 at the earliest.
The added payroll support would be a welcome help, but is likely only prolonging the inevitable. Absent a faster-than-expected rebound in demand, airlines are going to eventually need to shrink.
Given the uncertainty that clouds the entire industry, and American's specific risks, I'd advise caution before investors get on board with this particular airline stock right now.