Share prices of many airlines have gone back up since the early spring lows. However, they are still considerably down from their 52-week highs. Industry statistics show that passenger demand is continuing at low levels both in the United States and globally. And it’s uncertain when that demand will pick back up. For now, investors’ appetites for airline stocks have dampened.
Recently, the International Air Transport Association (IATA) announced that recovery through the summer has been “sluggish.” The industry body called upon governments to re-open borders between countries fully so that international travel can begin to pick up again. But for now, flying across the world is not easy.
Domestic passenger numbers are also still depressed. The U.S. Transportation Security Association (TSA) announces daily checkpoint travel numbers for both this year and last. On Oct. 24, 2020, the total traveler throughput was 755,287 people. A year ago on the same day, it had been 1,931,971 passengers. That’s a decline of over 60%.
What’s more, winter is at our doorstep and the second wave of the pandemic is coming. Even with potential vaccines on the horizon, it’s hard to imagine a therapy would be commercially ready for everyone who is willing to take it. Therefore, it will be a long winter for many airlines as they juggle resources amidst lack of revenue and continuing costs. Many may need further capital injection to stay afloat.
The U.S. and world economies are resilient and will eventually overcome the negative effects of the pandemic. But previous downturns in airline demand show a full airline recovery will take a while. On top of that, many airline shares do not offer a bargain. With that in mind, here are three airline stocks that should not be in long-term portfolios yet. These stocks are running out of time:
Airline Stocks: Allegiant Travel (ALGT)
52-week range: $60.06 – $183.26
Las Vegas-based Allegiant Travel is an integrated travel company whose operations also include an airline segment. The group was founded in 1997 and is authorized to fly scheduled and charter airline operations throughout the States. Its legal charter service also extends to Canada and Mexico. What’s more, ALGT stock’s market capitalization is around $2 billion.
On Oct. 8, though, the company released its reported preliminary passenger traffic results for the third quarter. This showed an average daily cash burn rate of $1.3 million. Quarterly total passenger numbers were 2,016,241, down 47% year-over-year (YOY).
Over the year, the company’s focus on low-cost, low-competition routes have served shareholders well. In 2008, the share price was in the $20 range. Now, it is hovering at a little over $130.
However, year-to-date (YTD), ALGT shares are down about 25%. Additionally, its forward price-to-earnings and price-to-sales ratios stand at 18.12 and 1.58, respectively. Those metrics do not make ALGT stock a bargain. Most of its expected improvement in revenue metrics seems to have already been factored into the price. At this point, ALGT is one of the airline stocks to stay away from — for the time being.
American Airlines (AAL)
52-week range: $8.25 – $31.58
Fort Worth, Texas-based American Airlines needs little introduction. Along with Delta (NYSE:DAL) and United (NASDAQ:UAL), American Airlines is one of the “Big 3” legacy airline stocks in the States. However, 2020 has been an extremely challenging year for the group.
On Oct. 22, it released Q3 metrics which showed another difficult quarter for the airline and its industry. Revenue of $3.2 billion meant a 73% decline YOY. Net loss of $2.4 billion translated into a loss of $4.71 per share. CEO Doug Parker commented:
“During the third quarter, we took action to reduce our costs, strengthen our financial position, and ensure our customers return to travel with confidence […] The American Airlines team is doing a remarkable job taking care of our customers and each other during the most challenging time in our industry’s history.
“We have a long road ahead […]”
Further, management highlighted the fact that passenger demand and load factors were still significantly below 2019 levels.
Daily cash burn rate stands around $44 million. To increase liquidity, AAL will issue up to $1 billion of equity. The airline’s total long-term net debt stands over $30.8 billion. That is a substantial amount of liability that will continue to weigh on the stock price.
YTD, the shares are down 61%. Its market cap stands at $5.6 billion. Because of this, AAL stock is not a buy right now. At these levels, other S&P 500 companies can likely offer better risk-return profiles.
U.S. Global Jets ETF (JETS)
52-week range: $11.25 – $32.36
Dividend yield: 2.96%
Expense ratio: 0.60%, or $60 per $10,000 invested annually.
Our final discussion centers around an exchange-traded fund (ETF). The U.S. Global Jets ETF provides exposure to a range of airline operators and manufacturers worldwide. It started trading in 2015.
In general, many market participants prefer buying ETFs, as they offer access to a basket of securities. That can diversify away company-specific risk. However, with a thematic fund in an industry that is suffering globally, it is hard to be optimistic for the near future.
JETS — which has 39 stocks (or equity holdings) — tracks the U.S. Global Jets Index. The top 10 holdings make up around 62% of net assets of almost $2 billion. Southwest (NYSE:LUV), Delta, United, American Airlines, and JetBlue (NASDAQ:JBLU) head the list of shares. In addition to United States-based companies, JETS stock also holds shares of firms from Canada, Mexico, Australia, Singapore, China, Germany, Turkey, the United Kingdom, France and elsewhere.
But despite having holdings across the globe, the fund is now down about 46% YTD. In fact, it hit all-time lows earlier in the year, landing around $12 in March, April and May. A trailing price-to-earnings of 20.98 and price-to-book of 1.15 do not make shares in JETS a steal either. Because of the tumultuous state of airline stocks overall, I would consider investing in another fund in another sector altogether.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.
