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Why Airlines Shares Are Gaining Ground Today

By Lou Whiteman - Updated Jan 28, 2021 at 2:54PM

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Earnings are bad, but they could have been a lot worse.

What happened

It is airline earnings season, and while 2020 fourth-quarter results were as dismal as expected, the companies are relatively optimistic about what's to come. That's helping the sector gain altitude on Thursday, a good day for broader markets as well.

Shares of American Airlines Group (AAL -5.22%) are leading the charge, up as much as 31% earlier in the day before falling back. American's push appears to be driven by factors unrelated to the airline's results. Shares of Hawaiian Holdings (HA -1.08%), Delta Air Lines (DAL -3.46%), Southwest Airlines (LUV -1.95%), United Airlines Holdings (UAL -4.98%), Spirit Airlines (SAVE -5.91%), and JetBlue Airways (JBLU -2.94%) all joined in on the action, each up at least 5% at one point on Thursday.

So what

The airline industry was among the sectors hit hardest by the pandemic, with demand for travel all but evaporating last spring and losses continuing through the rest of the year. The fourth-quarter results reflected the issues the companies face, with investors digesting results from three companies on Thursday.

  • Southwest lost $1.29 per share in the quarter on revenue of $2.01 billion, reporting its first annual net loss since 1972. Revenue for the quarter was down 65% year over year.
  • American lost $3.86 per share on revenue of $4 billion, down 64% from fourth quarter 2019.
  • JetBlue lost $1.53 per share on revenue of $661 million, a revenue drop of nearly 68%.

Hawaiian posted similar numbers on Tuesday, as did United and Delta earlier in the month.

A plane flying over the clouds.

Image source: Getty Images.

But investors were prepared for the losses. What they are focused on is the outlook for what is ahead. And while no airline sees a quick recovery, the consistent commentary coming out of post-earnings calls is that as the COVID-19 vaccine is rolled out there are expectations that demand will increase in the months to come.

American CEO Doug Parker called 2021 "a year of recovery," saying, "while we don't know exactly when passenger demand will return, as vaccine distribution takes hold and travel restrictions are lifted, we will be ready." JetBlue CEO Robin Hayes said, "I could not be more confident in our future."

If anything, Southwest Airlines, which has recovered better than most airline stocks, was the most cautious in its commentary. CEO Gary Kelly said, "while we hope to achieve cash burn break even in 2021, it is wholly dependent upon a substantial rebound in passenger traffic and revenue, and it is difficult to predict the timing of such a rebound."

Now what

The airlines have plenty of cash to wait out a recovery. Unfortunately, they are going to need it.

Kelly at Southwest has the advantage of heading one of the airlines with the most secure footing, and can afford to take a conservative outlook. There is still reason to hope that pent-up vacation demand will be unleashed by summer as the vaccine rollout progresses, but so far there is no clear evidence to suggest it is definitely happening.

Business and international travel, which tends to be more lucrative and which airlines like American, Delta, and United in particular rely on to boost results, will likely not come back until 2022 at the earliest.

For those who want to buy in and ride out the turbulence, stick with top names like Southwest and Delta that are best positioned for a slow recovery. Spirit, thanks to its industry-low costs and focus on leisure traffic, is an intriguing option if we do see bookings pick up ahead of the summer season.

Earnings season so far has only confirmed what we assumed to be true about the businesses in 2020, with no real clear answers about what 2021 will look like. That's not ideal, but it could be worse, and airlines are gaining ground on Thursday as a result.

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Stocks Mentioned

Southwest Airlines Co. Stock Quote
Southwest Airlines Co.
$44.23 (-1.95%) $0.88
JetBlue Airways Corporation Stock Quote
JetBlue Airways Corporation
$9.92 (-2.94%) $0.30
United Airlines Holdings, Inc. Stock Quote
United Airlines Holdings, Inc.
$44.63 (-4.98%) $-2.34
Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
$39.31 (-3.46%) $-1.41
Spirit Airlines, Inc. Stock Quote
Spirit Airlines, Inc.
$19.42 (-5.91%) $-1.22
Hawaiian Holdings, Inc. Stock Quote
Hawaiian Holdings, Inc.
$16.49 (-1.08%) $0.18
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
$16.89 (-5.22%) $0.93

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

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