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Why Airline Shares Climbed Higher on Thursday Morning

By Lou Whiteman - Sep 3, 2020 at 2:41PM

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The cruise industry provides a boost of optimism for the travel sector.

What happened

Airline shares jumped higher at the open Thursday on a hopeful sign of a travel recovery. United Airlines Holdings (UAL 1.85%) led the way, jumping 7.8%, with JetBlue Airways (JBLU -0.06%) gaining 7.3% and American Airlines Group (AAL 0.92%) and Spirit Airlines (SAVE 0.42%) each up more than 6%.

The stocks gave back much of those gains as the morning went on, but each was still in the green as of 11 a.m. EDT, at a time when the broader market was down more than 2%.

So what

Airlines have been hit hard by the COVID-19 pandemic, which has caused travel demand to all but evaporate. Industry watchers are expecting demand to remain sluggish through the early months of 2021 at the least, as it seems unlikely travelers will return until there is a vaccine.

A plane flying over the clouds.

Image source: Getty Images.

In this environment, investors have tended to react to any glimmer of optimism that suggests a recovery might happen sooner than feared. They got such a glimmer on Thursday as Carnival (CCL 2.05%) (CUK 2.52%) said its Costa Cruises brand will restart operations this weekend.

The cruise resumptions are only for Europe, and not the U.S., but given that the cruise industry has been hit just as hard as airlines by the pandemic any effort to normalize is a hopeful sign that we've entered a new phase in the recovery.

Spirit and American both operate major hubs in south Florida that are gateways for cruise passengers, and JetBlue also has substantial exposure to Florida and the Caribbean region. United also has a large leisure business, and that stock is likely also still feeling the impact of the airline announcing decisive actions to cut costs and preserve cash to ride out the downturn.

Airline shares also got support on Thursday from the advisory firm that runs the U.S. Global Jets ETF (JETS 1.26%) exchange-traded fund. In an investor update the advisors noted that daily Transportation Security Administration screenings hit 807,000 last Sunday, saying that further jumps "could spur a second big wave of airline equity buying."

Now what

All travel reopenings are a step in the right direction, but investors should be careful not to get ahead of themselves. There is nothing to suggest anything but a multi-year downturn for the industry, and even when traffic begins to normalize the airlines will have billions in added debt on their balance sheets that will need to be worked down over time.

For now, airlines have become trading proxies for broader sentiment on the outlook for an end to the pandemic. The sector tends to trade up on good news, and down on bad news, more on the headlines than on the fundamentals of individual companies.

For long-term investors, it is best to assume a slow turnaround and try to block out the noise. I believe it is safe to invest in airlines, but would recommend focusing on the strongest airlines and limiting the ownership to a small percentage of a diversified portfolio.

Lou Whiteman owns shares of Spirit Airlines. The Motley Fool owns shares of Spirit Airlines. The Motley Fool recommends Carnival and JetBlue Airways. The Motley Fool has a disclosure policy.

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Stocks Mentioned

JetBlue Airways Corporation Stock Quote
JetBlue Airways Corporation
JBLU
$8.68 (-0.06%) $0.01
Spirit Airlines, Inc. Stock Quote
Spirit Airlines, Inc.
SAVE
$24.60 (0.42%) $0.10
United Airlines Holdings, Inc. Stock Quote
United Airlines Holdings, Inc.
UAL
$38.52 (1.85%) $0.70
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
AAL
$14.88 (0.92%) $0.14
Carnival Corporation Stock Quote
Carnival Corporation
CCL
$10.02 (2.05%) $0.20
Carnival Corporation Stock Quote
Carnival Corporation
CUK
$9.14 (2.52%) $0.23
ETF Series Solutions - U.S. Global Jets ETF Stock Quote
ETF Series Solutions - U.S. Global Jets ETF
JETS
$18.49 (1.26%) $0.23

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

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