The novel coronavirus was detrimental to airline stocks as demand in the industry shrunk to nearly one-third its pre-pandemic levels. Major airlines burned through millions of dollars in cash, raised debt and equity to finance non-profitable operations and failed to get the funding they needed from the federal government. But despite these setbacks, airlines have still managed to pay their leases and meet their debt obligations on time.
As airlines fought to compete for the little business out there over the last few months, flight travel is also starting to pick up as cases decline. But airlines still face a lot of uncertainty on the speed of the recovery process and the amount of time it will take to recover profit margins. Nevertheless, this hasn’t stopped industry analysts from speculating on the best stocks to buy when the travel sector comes back to life. Some stocks provide a great buying opportunity while prices remain low.
Here are the top airline stocks to place your bets on right now:
Let’s take a look at what sets each of these apart from the other names that are struggling within the airline industry.
Airline Stocks to Buy: Delta Airlines (DAL)
Like many of its peers, the coronavirus pandemic dealt a hard blow to Delta Airlines. The price of DAL stock is down nearly 55% since the start of the year and it is currently trending at just $33.96. But despite a bleak industry outlook, the company’s fundamentals remain secure.
Delta earnings took a hit as revenue declined from $47 billion in 2019 to just $1.2 billion in this past quarter. But the company did everything in its power to improve its liquidity position. The airline decreased its daily cash burn rate from $100 million per day in March to just $27 million per day in June. It also entered a credit facility for $3 billion in March and once again for $6.5 billion later in the year.
The company’s ability to raise debt-to-equity despite facing incriminating losses is a testament to the durability of Delta. Analysts also remain optimistic about the future of the company. As reported by Barron’s, analyst Daniel McKenzie believes that Delta is an “efficient and profitable airline” and expects the airline stock to trade at $50 in 2022 with earnings per share of $6.
Given Delta’s size and strong liquidity position, it is likely that the company will be able to weather the Covid-19 storm and emerge from the crisis stronger than ever.
Southwest Airlines (LUV)
In terms of reputation, Southwest Airlines holds the top position among its peers in the U.S. However, this does not mean that the company was immune to the effects of the coronavirus pandemic. In its second quarter, the airline reported a loss of $2.67 per share and had an estimated cash burn rate of $23 million, which is a major cause for concern.
However, this number has improved since then and Southwest now expects a cash burn rate of just $17 million per day in August and September. This improvement was attributable to the increase in air travel and the decrease in spending over the last few months. The airline’s revenue efficiency has put the company in a great position against its U.S peers.
In addition to its strong fundamentals, Southwest also has the ability to bounce back from the pandemic due to its loyal customer base. Despite the increase in air travel, Southwest has promised that it will only book two-thirds of the flight’s capacity till October to abide by social distancing rules. This is an effort to prioritize customer safety even if it means revenue has to take the back seat.
Although Southwest does have its drawbacks, the company’s relatively strong balance sheet and loyal customer base could put this airline stock back on track when travel rebounds. It would be wise to pick up this stock while prices remain low.
Alaska Air (ALK)
While there’s no denying the power that the big four airlines in the U.S. hold, it’s also worth looking at smaller airline stocks as travel makes a comeback. Alaska Airlines is a company that has always flown under the radar but its strong fundamentals make this airline stock a winner in a volatile industry.
One of Alaska Airlines’ key advantages is its dominant position in the Pacific Northwest — the airline controls 54% of the market in Seattle. It’s worth noting that companies like Amazon (NASDAQ:AMZN) and Starbucks (NASDAQ:SBUX) are headquartered in this region. This means that once it’s safe to travel again, corporate travel in the region will see a major uptick.
Another growth driver for Alaska Airlines is its recent partnership with American Airlines (NASDAQ:AAL), which includes the exchange of flights and mileage rewards. This is expected to increase revenue in the coming months. Alaska is also expected to join the Oneworld alliance at the end of 2020 and the company can leverage revenue from key hubs to accelerate its path to recovery.
On the date of publication, Divya Premkumar did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020.