Several upbeat comments by Southwest Airlines (NYSE:LUV), which reported its first-quarter results yesterday, bode well for the longer-term outlook of American Airlines (NYSE:AAL) stock. Southwest’s comments are also positive for all airlines in the U.S.
During Southwest’s Q1 earnings conference call, Southwest CEO Gary Kelly said “it feels like” the company’s revenue trends “bottomed out the first week of April.” He added that “we’ve seen very gradual improvement in weeks two and three [of April].” Kelly said he was hopeful that revenue trends would continue to rebound in May.
The CEO appeared to hold out hope that June will rebound meaningfully from a revenue standpoint, saying “we’ve got pretty modest expectations … for June at this point. And hopefully we’re too pessimistic there.” The CEO added that, “hopefully by July, August, we’re beginning to see some improvement that would encourage us” and help Southwest’s management determine how to proceed going forward.
So Kelly did not rule out the possibility of a significant recovery in the summer. That’s certainly good news for American Airlines and AAL stock.
When American Airlines reports its Q1 results tomorrow, it will obviously be very important to see whether American’s CEO, Doug Parker, also indicates that the airline’s revenue appears to have bottomed. Of course, such a statement would be very positive for American Airlines and the company’s stock.
States’ Openings Are Positive for American Airlines
In his statements yesterday, Kelly, Southwest’s CEO, indicated that airlines will benefit from the lifting of closures enacted in response to Covid-19. In several recent columns about airline stocks, I’ve expressed the idea that demand for airplane tickets will increase when states reopen, giving travelers fun and interesting things to do when they arrive at their destinations.
Kelly expressed that notion as well, saying “for those who are willing and able to travel, the country needs to open back up. So there’s something for people to do when they get there.”
So it’s certainly positive for American Airlines and its peers that, in recent days, multiple states have started opening their economies. Texas, Oklahoma, Ohio, Arkansas, Mississippi and Tennessee are among the states that either have or will soon reopen much of their economies. Further, many beaches in Florida are now accessible, and New York Governor Andrew Cuomo has indicated that he would soon reopen parts of upstate New York.
Gilead’s Drug May Make a Big Difference for American Airlines
Today, Gilead (NASDAQ:GILD) announced that its drug, remdesivir, had met its primary endpoint in a clinical trial (with a control group) that was being supervised by the National Institute for Allergy and Infectious Diseases. In other words, the study showed that the drug had a meaningful, positive impact on coronavirus patients.
Further, a study released by Gilead showed that over 90% of the 397 patients who received its drug survived after two weeks. Moreover, 235 of the patients exhibited “clinical recovery.” Importantly, before receiving remdesivir, all of the patients showed “evidence of pneumonia” and had “reduced oxygen levels.”
Even if 100 of the 162 patients who did not exhibit clinical recovery after two weeks ultimately died, nearly 75% of the patients who had severe Covid-19 and received the drug will have survived. I think that indicates that the drug is effective and will significantly lower the case fatality rate of the virus, which currently stands at at 5.7% in the U.S.
In any case, the fact that there is a viable treatment for the virus should greatly lower fear of the illness, reducing trepidation about traveling and greatly helping American Airlines and other airlines.
The Bottom Line on AAL Stock
It won’t be all smooth sailing for the airlines going forward. Southwest’s CEO said that the company’s operating revenue is still down 90%-95% year-over-year for April and May, while its airplanes are flying more than 90% empty.
But the fact that Southwest’s revenue already appears to have bottomed is huge news. With more states opening their economies and estimates of the virus’ fatality rate already falling and likely to drop further based on the success of Gilead’s drug, fear of the virus is declining and will show additional easing soon. As a result, many more people will soon be ready to fly.
Moreover, the opening of many states’ economies is a meaningful, positive development for AAL stock. Given all these trends, I recommend that longer-term investors buy the shares.
As of this writing, Larry Ramer owned shares of GILD stock. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.