It’s interesting how a sector of the economy can be stable for years before a black-swan event sends investors reeling. In the particular case of airline stocks, the spread of the novel coronavirus added a measure of volatility that hardly anyone saw coming.
To make matters worse, legendary investor Warren Buffett famously dumped his shares of some very well-known names in the aviation industry. Three of those names are:
Was the Oracle of Omaha right to give up on these airline stocks? Or is there still hope, and perhaps even serious profit potential, for these investments? Let’s take a closer look and see if these three aviation-sector names could be tomorrow’s high flyers.
Airline Stocks to Buy: Delta Air Lines (DAL)
With air traffic down 90% or more on a year-over-year basis, it’s understandable that Buffett lost his resolve to hold onto DAL stock. On the other hand, there may be a lifeline coming in the form of a government bailout.
As the company reports: “The agreement with [the] Treasury includes $5.4 billion from the payroll support program. The payment includes an unsecured 10-year low-interest loan of $1.6 billion, and Delta will provide the government with warrants to acquire about 1 percent of Delta stock at $24.39 per share over five years.”
That’s a massive relief package and could be enough to sustain Delta for a while. Moreover, the company is enacting cost-cutting measures. These include “a companywide hiring freeze and offering voluntary leave options with 37,000 employees taking short-term unpaid leave.”
Hopefully these proactive measures, along with the government’s bailout money, will enable Delta to get through this challenging time.
American Airlines (AAL)
Another investment worth considering, assuming you can handle the risks involved, is AAL stock. Like Delta, American Airlines should receive a much-needed boost from government funding.
Because of the passage of the Cares Act, American Airlines can access $10.6 billion worth of funding from the U.S. Treasury. Even prior to that, the company was in a strongly cash-positive position with $6.8 billion worth of liquidity available at the end of 2020’s first quarter.
And also like Delta, American Airlines is taking measures to cut costs. For instance, the company has retired around 80 of its planes, including some older ones. In fact, American Airlines even retired its fleet of 15 Airbus (OTCMKTS:EADSY) A330-200 airplanes.
The A330-200 is one of Airbus’s larger jet models. With passenger volume being low, it’s a smart move for American Airlines to discontinue using them.
United Airlines (UAL)
The other two airline stocks mentioned above are focusing on government-bailout funding as a lifeline. United Airlines, in contrast, is taking a somewhat more self-reliant approach. That’s commendable and should hearten distressed UAL stockholders.
By using a bond offering to raise $2.25 billion, United Airlines is avoiding the strings that may be attached to taxpayer-underwritten bailout money. Keep in mind, however, that the company has still accepted some government funding, including payroll aid.
Given the cost-cutting measures that Delta and American Airlines have in place, potential investors might wonder what United Airlines is doing to reduce its expenses. That’s a reasonable question, and it’s good to know that cost-cutting measures are in place now.
Specifically, United Airlines revealed that it intends to cut 3,450 or more of the company’s management and administrative workers. That’s a massive cut — 30% — and it would take effect on Oct. 1. United Airlines also warned its pilots to brace for changes.
Job cuts are an unfortunate part of life during the coronavirus crisis. In the case of United Airlines, it appears to be part of a cost-reduction effort that could ease the financial pressure while the company strives to get back on its feet.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, David Moadel did not hold a position in any of the aforementioned securities.