Coming into earnings season, investors knew the airline industry had a terrible third quarter, but they were less certain about what management would say about what lies ahead. The mood, so far, has generally been upbeat. That and some company-specific news regarding a deal with labor is giving a lift to the sector on Thursday.
Shares of JetBlue Airways (NASDAQ:JBLU) and Spirit Airlines (NYSE:SAVE) each traded up 8% as of 2:15 EDT, while shares of Hawaiian Holdings (NASDAQ:HA) were up 7%, and Southwest Airlines (NYSE:LUV) and Delta Air Lines (NYSE:DAL) were each up more than 5% apiece.
It's been a tough year for airlines, with the COVID-19 pandemic wiping out demand for travel and pushing the entire industry into the red. Southwest on Thursday reported its worst loss in corporate history, but CEO Gary Kelly told investors the $1.2 billion loss was "significantly less" than feared several months ago.
The industry expects to continue to lose money in the months to come. But it's reaffirming that, with billions in cash in the bank, there are no immediate bankruptcy risks. The hope is that even if travel does not fully return for years, as feared, there will be enough of a bounce back in 2021 as a COVID-19 vaccine comes to market that the airlines will be able to cut losses and ride out the storm.
That will likely mean further cost cuts. JetBlue is surging on Thursday after announcing it has reached a tentative agreement with the Transport Workers Union on a new contract with its in-flight crew members. The airlines are hopeful of cutting costs without causing riffs with labor that could take years to mend, so any consensual agreement in this environment is viewed by investors as a win.
Spirit has not yet released earnings, but the company did announce an overhaul of its loyalty program in an indication that it is past the triage stage and looking toward trying to win flyers as they return to the skies. Spirit has the industry's lowest costs and should be one of the major beneficiaries, assuming travelers are initially lured back by low ticket prices.
Delta, along with Allegiant Travel (NASDAQ:ALGT), seems to be benefiting from the updraft.
One airline lagging the rally is American Airlines Group (NASDAQ:AAL), which like Southwest reported earnings on Thursday. While American actually lost less than expected, it said its board had authorized it to sell up to $1 billion in new stock.
American is widely viewed as the weakest of the major carriers, and though it ended the quarter with $13 billion in liquidity and should be no bankruptcy threat, it will emerge from the crisis with more than $30 billion in debt, meaning it will likely take longer than most to recover.
Similarly, United Airlines Holdings (NASDAQ:UAL) is up less than 2%. United provided a relatively upbeat assessment late last week but will need network adjustments to benefit as demand eventually returns.
We're more than halfway through earnings season, and the situation is exactly what we thought it would be. The airlines have the resources to survive, but they will likely struggle to thrive until traffic returns. With that possibly years away, it is hard to get excited about the stocks right now.
That said, the shares remain at levels far below where they were prior to the crisis. For those willing to wait out a recovery, there should be real opportunities to see these investments grow over time.
Given the risk and the continued uncertainty about the pandemic, it's best to limit airline exposure to a small part of a diversified portfolio, and stick with top operators with the best chance to survive. I'd recommend Southwest or Delta, with Spirit an interesting option if vacation travel does start to return by next summer.