Airline stocks are in a state of flux after President Donald Trump ended talks on a broader stimulus package.
The development places a shroud of uncertainty over the broader economy. But it is hitting the airline industry particularly hard. No sector has been slammed as severely by the novel coronavirus pandemic as this sector.
It needed a massive bailout package to stay afloat and keep workers employed. Without the stimulus money, we could be seeing massive layoffs as airlines struggle with the cash burn. Demand will take time to recover, especially with a vaccine expected in 2021 at the earliest. Trump tweeted support for airlines, which sent airline stocks northward, but the schematics are still up in the air.
That’s why you should keep an eye on these three stocks, especially if you have them in your portfolio:
Airline Stocks: Delta Air Lines
Out of all the major legacy carriers, Delta has the best chance of coming out of this crisis in somewhat good shape. As of its last quarter, Delta is burning $27 million in cash per day, substantially lower than the $100 million in March. Delta has also done well to streamline operations and cut costs. Considering the state of affairs, it seems the most prudent way to go.
However, that’s not to say you should expect bumper quarters from the legacy carrier. Analysts are forecasting a 75% dip in Q3 revenue. In my article on the company, I discussed how, with $15.7 billion in liquidity, Delta had enough in the tank to outlast this crisis. However, it will be a while before we see revenue return to pre-pandemic levels.
That fact hasn’t changed. What has changed since that time is that the world is bracing for a second Covid-19 wave, and the second stimulus bill stands delayed. Still, if you want to take a bet on some of the larger legacy carriers, DAL stock is the best in the business at the moment. Not only has it steadied cash burn, but the management has taken prudent steps to reduce costs early on in the piece.
While the larger airlines remain under stress, the smaller carriers have a better shot of handling this crisis. That’s why Southwest is in much better shape than some of its more established peers.
As I have said in this piece, travel demand is sluggish, and it will take a long time for it to recover. That’s why the prime focus has shifted toward cash management and the short to mid-term guidance. Considering Southwest has a daily cash burn rate of $16 million, down from more than $25 million a day in March. Initially, the company estimated cash burn to be more than $30 million for the second quarter. The fact that the company managed to keep burn rates down so much is hugely positive for investors.
There is also a unique advantage that Southwest has versus its peers. Unlike the majority of legacy carriers, the company is mostly a domestic carrier. Since domestic travel is rebounding at a faster rate than international travel, Southwest is in a better position to mount a comeback in comparison to its peers. We’re also likely to see higher holiday travel in the next three months since the Christmas season is coming up. With outbound travel largely restricted, local travel will increase. As we’ve already discussed, any uptick in local travel will help Southwest.
In closing, with $14 billion in cash at the end of the second quarter, Southwest can survive two years. LUV stock trades at 2.18 times price-to-book, a 14.28% discount to the sector median.
We finish this list of airline stocks to watch with another domestic carrier with all the tools to do well in the current environment. Spirit is a budget airline that tries to keep costs down through operating a very lean business model. That helps it undercut prices and stay ahead of the competition.
In response to the coronavirus pandemic, the company reduced its capacity by 90% in May. Spirit Airlines ended the second quarter with $1.2 billion in cash. Daily cash burn came in at $1.5 million in June, down substantially from $9.5 million a day in April.
The entire business model for Spirit is built on low costs, and with the recession, a price war will benefit carriers like Spirit. Its approach has helped the company earn a 5-year average return on equity of 17.3% and a 5-year return on assets of 6.7%. When you compare it to a similar sized carrier like JetBlue Airways (NASDAQ:JBLU), having a 5-year ROE and ROA of 15.4% and 6.5%, respectively, then you see that Spirit has done quite well.
SAVE stock trades at a 0.63 times price-to-book, a 73.35% discount to the sector median of 2.35 times.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.