Stock Markets Recover; Airlines Gain Altitude Despite Red Ink

The stock market rebounded sharply on Thursday from its losses the previous day as investors looked beyond all the short-selling controversy and focused instead on the growing likelihood of additional stimulus for the U.S. economy. The Dow Jones Industrial Average (^DJI 0.40%), S&P 500 (^GSPC 1.02%), and Nasdaq Composite (^IXIC 2.02%) finished well off their highs, but they still finished with solid gains on Thursday.

Data source: Yahoo! Finance.

Airline stocks have been in the news lately because they've been at the epicenter of the COVID-19 pandemic and its impact on the economy. Today, Southwest Airlines (LUV -0.84%) and American Airlines Group (AAL -1.77%) gave their latest reports on how they're faring, and gains for their stocks showed some optimism for the road ahead.

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Southwest flies higher

Shares of Southwest Airlines finished the day up 1%. The airline is still struggling from the impact of the COVID-19 pandemic, but investors seemed generally encouraged by what the future could bring.

The numbers at Southwest certainly looked ugly. Fourth-quarter operating revenue came in 65% lower than the previous year's period, with revenue per available seat mile falling more than 40%. The airline lost $761 million in the quarter even leaving out special items, bringing the company's total adjusted net loss for the full year to $3.5 billion.

Southwest highlighted the fact that it still has $14.3 billion in available liquidity. That's considerably higher than its debt and gives it a solid cushion to withstand the ramping-up period once the pandemic is under control.

However, Southwest isn't seeing even the coronavirus vaccine rollout as helping it substantially in the near term. The airline is therefore expecting roughly $17 million per day of cash burn through the first quarter, with hopes that it'll be able to break even on a cash flow basis for the full year in 2021. With load factors of just 50% to 55% expected for January and February, and revenue down 65% to 70% in January and 65% to 75% in February, Southwest still needs a lot of improvement.

American

Elsewhere among airlines, American Airlines Group's fourth-quarter report had much the same view of the industry. Yet its stock surged, climbing more than 9%.

Again, American wasn't able to deliver any rosier a picture of its affairs than Southwest. Revenue during the quarter was down 64% from year-ago levels. Capacity fell 53%, and the company lost $2.2 billion, capping a year with $9.5 billion in red ink on an adjusted basis.

Like Southwest, American was focused on liquidity. American expects to complete the first quarter of 2021 with about $15 billion in liquidity available. That'll be essential, as the company burned about $30 million per day in cash during the fourth quarter. At the same time, American was also pleased at its competitive stance. CEO Doug Parker said that American flew more customers than any other airline in 2020.

In the first quarter, American sees things continuing to look depressing. Total revenue will likely be down 60% to 65% compared to where levels were two years ago in 2019, with capacity down 45%.

A year of recovery

For both Southwest and American, 2021 is destined to be a year of recovery. The unanswered question, though, is how much the airlines will be able to recover while there's still so much uncertainty both in the airline industry and in the broader market overall.