Can Airline Stocks Make A Huge Comeback in 2020 and Beyond?
Months after the outbreak of the Covid-19, airline stocks continue to grapple with a sharp decline in travel. Although the rate of air travel is up from its March lows, this is still nowhere near its pre-pandemic levels. Estimates show that airliner revenue fell by almost 90% in Q2, leaving many passenger airlines to compete for the little business out there. Here is what to consider when considering airline stocks in 2020.
What does the future hold?
Nevertheless, investors continue to remain optimistic in the future of the sector and are expecting a multiyear turnaround. This confidence stems from the fact that none of the major airlines in the U.S have had to file bankruptcy to date. Moreover, these companies are also supported by a healthy financial cushion in the form of government aid.
As part of the CARES Act, major passenger airlines in the U.S received $25 billion in government funding with an additional $50 billion in private funding. Theoretically, this helps keep the industry afloat in this current environment. With the government aid set to expire at the end of September, Congress appears to be close to an agreement on a second round of stimulus.
Investment gains can be hard to forecast in an uncertain environment but air travel will pick up once the pandemic is behind us. Air travel is a necessity that isn’t going anywhere. Putting money behind airline stocks can be a smart strategy. The low prices are a generally considered a good buying opportunity. Which airline will come out on top? Here’s our take:
Boeing (Ticker: $BA)
Boeing, one of the largest airline manufacturers in the world, is having a tough time in the past couple of years. The company’s stock is down 50% year-to-date due to the engine failure of the 737 Max and the Covid-19 pandemic. After burning through $4.3 Billion in cash through the first half of 2020, the company is back on investors’ radars.
Boeing announced that it is making progress towards making the 737 Max airborne again in the U.S and Europe. This would be a huge win for the company as revenue from this aircraft will help it get back on track towards profitability.
In addition to this, Boeing also announced that it is looking to cut costs and improve its bottom line. The company is expected to thin-out its middle management, shut down ancillary offices and cut spending on R&D. These actions would put the manufacturer in a slightly better position as the industry heads towards a new normal.
Boeing is not out of the frying pan yet, but the company is definitely making progress. The return of the 757 Max and an improvement to its bottom line is reason enough to consider this airline stock.
American Airlines (Ticker: $AAL)
American Airlines is one of the oldest airlines in the skies and touts an extensive network in the U.S and abroad. However, AAL also carries a large debt balance. This means a further decline in travel could be detrimental to the company.
In the months following the pandemic, American Airlines was forced to furlough a large percentage of its workers in lieu of budget cuts. However, the airline announced that it secured a loan with the Treasury Department in late September.
American Airlines will receive a $5.5 billion loan facility from the government. This loan may be extended to $7.5 billion, if the need arises. This is the maximum amount of aid any passenger airline can receive from the government.
The grant will help AAL avoid unnecessary job cuts in the next few months – theoretically. It will also allow management to plan for FY21 and FY22 when demand for air travel recovers. Although the pandemic will continue to weigh on AAL stock, the aid will help it weather the Covid19-storm with ease.
United Airlines (Ticker: $UAL)
Among the other companies that benefits from government aid last month was United Airlines. The company is one of the key players in the airline sector with operations in Silicon Valley and the energy sector. With business travel down for the foreseeable future, UAL is facing some serious losses from the lack of demand.
But for some investors, all hope is not lost. According to Ryan Giannotto, United was one of the top names in the airline industry before the pandemic hit. This means that the company is likely to be the first to make a comeback once travel resumes. Thanks to a strong bottom line, United was able to spearhead the pledge to remove change fees for tickets.
This move (quickly replicated by fellow airlines) will keep demand stable for the coming months. United has also ramped up Covid testing on its flights and announced that it has resumed flights between San Francisco and China. This could help increase revenue numbers in the coming months.
With a government stimulus check and a slow but steady revival of travel, makes UAL stock worth your time at the current price.
Delta (Ticker: $DAL)
Delta holds the title as one of the most innovative airlines in the world. However, like much of the sector, the pandemic took its toll on the company. Prior to the pandemic, the airline was in the process of building up its extensive network in Mexico, China and Brazil. But some of its partners have filed for bankruptcy since then.
Unlike other airlines that took a share of the government aid package, Delta opted to take on $6.5 million in debt through SkyMiles. Taking assistance from the government will inadvertently affect equity or senior debt commitments. Both actions could lower the value of DAL stock. However, using a frequent flyer program could lower brand loyalty if the miles are worth nothing.
Delta is set to release Q3 earnings in the coming week. With no financial stimulus from the government, analysts are expecting the worst (which is usually bullish). It is estimated that revenue will decline by 75% due to low passenger activity this summer. DAL is a battered stock and investors will need to consider your portfolio’s position before they make a decision. An investment in Delta will require a gargantuan amount of patience as airlines prep for a slow road to recovery.
Spirit (Ticker: $SAVE)
Among the major U.S airlines, Spirit is known for its low-cost service with operations in the U.S, the Caribbean and Latin America. Like many of its peers, SAVE stock declined by 86% since the onset of the pandemic. Analysts predict that this value will never fully recover until 2024.
However in the event that air travel does pick up, many believe that customers will be attracted to Spirit’s cheap fares. But given the unpredictability of the virus, the possibility of this is fairly bleak. In terms of an investment in its stock, United is fairly optimistic about its Q3 earnings. The company predicts its numbers will be better than initial expectations thanks to a strong operating yield.
Furthermore, the airline has estimated a lower cash burn rate in the third quarter. Spirit has also announced plans to raise $600 million. This will be structured through the sale of secured notes, and will be backed by a lien against its loyalty program and other intellectual property. Analysts now remain more bullish on $SAVE stock and have adjusted forecasts for an improved outlook.
Airlines were among the industries hit the hardest this year. While airline stocks are definitely on the rise, the future still remains uncertain. Nations across the globe are experiencing a second surge of cases and this could delay airline recovery.
So when it comes to investing in airline stocks, investors need to consider their risks before they buy-in. With a long and unpredictable road ahead, it may take a while before these stocks generate any returns. But on the flip side, the current environment also offers a great buying opportunity while prices remain low. After all, good things come to those who wait.