Stock markets are down as they await a deal in Washington, D.C. on new economic stimulus measures to help individuals and businesses. If a stimulus deal is reached, stocks are expected to pop. And no sector is likely to jump higher than airline stocks.
Air carriers in the U.S. have been struggling mightily as earlier government relief measures run out and they are forced to cancel flights, furlough staff and ground more aircraft. A new stimulus package being negotiated between Democrats and Republicans is expected to include new money to help airlines survive until a Covid-19 vaccine is available.
Here are seven airline stocks to buy on the current stimulus hopes.
- American Airlines (NASDAQ:AAL)
- United Airlines (NASDAQ:UAL)
- Delta Airlines (NYSE:DAL)
- Southwest Airlines (NYSE:LUV)
- JetBlue Airways (NASDAQ:JBLU)
- Alaska Air (NYSE:ALK)
- Spirit Airlines (NYSE:SAVE)
Airline Stocks: American Airlines (AAL)
The largest airline in the U.S. (and the entire world) has been particularly hit hard by the pandemic because of its large number of international routes, the majority of which have been decimated by border closures and travel restrictions imposed by foreign governments.
In recent weeks, the carrier has begun furloughing 19,000 employees. American Airlines Chief Executive Officer Doug Parker has said that Washington, D.C. needs to come up with an additional $25 billion of aid for airlines in order for the carrier to begin recalling impacted workers.
In March, Congress approved $25 billion, mostly in grants, to cover passenger airline payrolls through September, and up to another $25 billion in loans that airlines could use for other purposes. American Airlines has borrowed $5.5 billion from the U.S. Treasury but says it is not enough to help the carrier over the coming six months.
While there was an uptick in the summer, U.S. air travel remains down nearly 70% from a year ago. AAL stock remains down 55% year-to-date at $12.56 a share. But as the biggest of the airline stocks, it is likely to get a sizable lift if a new stimulus bill is reached by lawmakers.
United Airlines (UAL)
United Airlines has also been making tough decisions in recent weeks. The carrier has announced that it is furloughing 13,000 employees, more than half of which are flight attendants. United achieved thousands more staff reductions through early retirements and voluntary leave packages.
The staff reductions came after the airline reported that it lost $1.8 billion on revenue of $2.49 billion in its most recent quarter as sales fell 78% year-over-year. Passenger traffic at United fell 83% in the quarter, causing United to lose about $25 million per day since early June.
If there’s a silver lining in the dark clouds that United Airlines is currently flying through, it is the fact that the company is planning its recovery from the pandemic, even though it doesn’t expect passenger traffic to return substantially until 2022.
In the meantime, United is drawing from its $19 billion cash pile to help it survive and plot a return to normal operations. It is also shifting its focus to serving domestic U.S. routes instead of international destinations and has parked more than 150 aircraft in long-term storage.
UAL stock remains down 58% year-to-date at $35.50 per share. Investors should take comfort that the carrier has the cash on hand to get to the other side of the global pandemic.
Delta Airlines (DAL)
Delta Airlines hasn’t only seen a downturn in leisure travel, it has been hurt by the evaporation of business travel as well. The Atlanta-based airline’s business revenues dropped 86% in the third quarter, while leisure passenger sales fell 82% in the same period.
The result is that Delta burned through more than $20 million of cash a day between June 1 and August 31. Delta Chief Executive Officer Ed Bastian recently said that he expects corporate travel, which provides half of the airline’s revenues, was likely to be 20% below 2019 levels in two years.
In response, Delta Airlines has begin changing its management structure from senior executives down to middle managers. It has also reduced its workforce by one-fifth (about 17,000 employees), primarily through early retirements and buyout packages.
Whether it will be enough to keep the airline aloft remains to be seen. But with more people working from home and in-person business meetings being replaced by video conferences, it is likely to be a tough climb back for business air travel. DAL stock is down 44% year-to-date at about $32 a share.
Southwest Airlines (LUV)
The world’s biggest low-cost airline has been tested during the Covid-19 outbreak. Many of Southwest Airlines most cherished policies have been altered this year. Policies such as no pay cuts and no furloughs for staff have been put in jeopardy as the airline struggles with a steep downturn in leisure and vacation travel.
Southwest has always touted the fact that never furloughed or cut worker pay in its nearly 50 years of flying. But now, the carrier has been forced to seek pay concessions from its unionized workforce and has announced plans to reduce its nonunion workers’ pay by 10%.
Southwest Airlines has also cut 90,000 flights from its November and December schedules because holiday travel and trips to sun destinations have fallen off a cliff. Without additional stimulus, the carrier is likely to make more cuts in coming months.
LUV stock is down 23% at about $41 a share. However, investors should expect airline stocks like LUV to jump sharply higher once Covid-19 restrictions ease and Americans are able to resume vacation travel safely.
JetBlue Airways (JBLU)
JetBlue suffered a blow recently when Fitch Ratings, an American credit rating agency, cut the airline’s credit rating to “junk” status. That kind of rating doesn’t inspire confidence in investors.
The ratings downgrade came as JetBlue added substantially to its debt load in recent months. At the end of June, the company had $5.6 billion in debt and lease liabilities, up from $3.2 billion at the beginning of 2020. It has continued to add to its debt load over the summer and into the autumn. Fitch also said it expects a slow recovery in air travel demand and believes JetBlue won’t be able to cut its costs as much as some of its larger rivals, causing cash burn to continue into 2021.
Despite the negative sentiment, JetBlue could benefit from the fact that is has modest exposure to business travel and no long-haul international business. Once a vaccine is available, leisure travel demand should recover more quickly to destinations such as Florida and the Caribbean, where JetBlue’s business is concentrated.
At the same time, JetBlue has significantly reduced its capital spending through 2022, with just $1.1 billion of committed aircraft spending in 2021 and $900 million in 2022. JBLU stock is down 32% year-to-date at $12.26 a share.
Alaska Air (ALK)
It is not just national and international airline stocks that have been hard hit by the pandemic. Regional carriers have also seen their business plummet this year. Case in point: Alaska Air. The fifth largest airline in the U.S., Seattle-based Alaska Air has had to make changes and rely on reserve funds to weather the economic downturn. However, Alaska Air has been more successful than many other airlines in recent months.
The company has been able to keep its cash burn under control and below expectations. The airline said it burned $117 million in September, below the estimated $150 million it had estimated for the month. For the third quarter as a whole, Alaska Air’s daily cash burn averaged $4 million, down 70% from the second quarter. The carrier had $3.6 billion of cash on hand, along with access to nearly $1.8 billion of additional low-cost loans from the federal government heading into October, enough cash to last more than three years.
The positive results are due to Alaska Air’s base in the Pacific Northwest, where Covid-19 has not been as bad, and that the airline has been able to maintain leisure travel flights to outdoor tourist destinations in the mountains. Plus, Alaska Air caters to high-tech workers on the West coast who have been less impacted by the pandemic. ALK stock is down 40% year-to-date at about $40 a share.
Spirit Airlines (SAVE)
Last up on this list of airline stocks is Spirit. Spirit Airlines has been harder hit this year than just about any major carrier in the U.S. The Miami, Florida-based low-cost carrier has seen its stock price fall 57% year-to-date to about $17 a share.
Analysts are skeptical of the carrier’s ability to rebound anytime soon given its focus on vacation destinations, primarily in the Caribbean. Indeed, Spirit’s losses have been piling up. In the second quarter on an adjusted basis, Spirit lost $3.59 per share — about $286 million.
However, some analysts and investors remain bullish on SAVE stock. They point to the fact that Spirit Airlines is not dependent on business travel and that the company’s low cost, no frills model makes it easy to contain costs and adapt to the proverbial new normal. Also, Spirit just raised $850 million in debt backed by its brand and loyalty rewards programs. The carrier should have enough liquidity to manage through the current downturn and emerge intact on the other side.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article.