Airline stocks have already begun bouncing back from big losses in 2020. For example, in the last three three months, Delta Air Lines (NYSE:DAL) stock has jumped 24% and United Airlines (NASDAQ:UAL) stock climbed 21%.
That’s largely because, more or less in line with predictions I’ve made since April, demand for airline tickets has surged. Vaccines for the novel coronavirus have been successfully rolled out and others look set to follow soon.
Amid recent rising coronavirus case and death totals, however, some have recently become much more bearish on airline stocks. For example, on Nov. 30, Barron’s wrote that “near term, airlines face a tough outlook,” while “airline stocks face short-term struggles.”
However, Secretary of Health and Human Services Alex Azar, says every nursing home patient in the U.S. could be vaccinated by Christmas. Former New York Times reporter Alex Berenson, who has written multiple short books on the coronavirus, wrote that such a development would mark “the end of the epidemic.” In a tweet, he explained that “without those 50% of deaths it’ll be indistinguishable from a bad flu year, though the media will try its hardest.”
In other words, as total deaths from the coronavirus drop by 40%-50% following the vaccination of nursing-home patients and case totals also fall meaningfully ,the disease will not seem nearly as scary. If Azar’s goal is met, that phenomenon should begin to take hold by the end of January.
And as more vulnerable Americans are vaccinated in February and March, the trend should accelerate further. Also important to remember is that the majority of those who get vaccinated should be ready and willing to fly, as people who get the virus after receiving the shot are expected to have only mild symptoms.
Conventional wisdom among analysts still appears to be that demand for flights will be well below 2019 levels even in 2022. I don’t expect that to be the case at all; shortly after the coronavirus largely disappears by late spring or early summer of 2021, thanks to the herd immunity created by the vaccine, demand for flights should reach or even surpass 2019 levels.
With business and international flying significantly more depressed than domestic leisure travel, discount airlines that focus on the latter category are much more attractive than their peers.
These three airline stocks fit in that criteria:
Airline Stocks to Buy: Allegiant Travel (ALGT)
Allegiant focuses on domestic leisure travel. That, combined with its industry-low costs, is a big reason why, in late October, the airlines reported that it was “flirting with cash-flow break-even.”
It added that “while the environment remains fluid and bookings will certainly ebb and flow, our data suggests these average booking levels are sustainable moving forward.”
Moreover, airline’s third quarter operating profit, excluding certain items but including the money from the U.S. government, came in at break-even. As of the end of Q3, its current ratio was a manageable 1.22, while its net debt, at just under $1 billion, is not too terrible, since it’s only about 50% of the airlines’ 2019 revenue of $1.84 billion.
Allegiant reported that in November, it experienced drop in bookings and an increase in cancellations at the Covid-19 pandemic accelerated. Yet its passenger total for November dropped a relatively low 38% year-over-year. Further, the company reported that its peak days demonstrated “far more resiliency, a trend expected to hold through the Christmas holiday.” That bodes well for its December results.
Another positive catalyst for ALGT stock is that, given its status as a discount airlines, it should actually benefit from the somewhat weak economy.
Spirit Airlines (SAVE)
Spirit is also primarily focused on leisure travel within the U.S. According to Barron’s in early October, Deutsche Bank analyst Michael Linenberg called SAVE stock a good equity for those ““seeking names more leveraged to a recovery in air travel demand.” On Dec. 11, citing various “downside risks,” Linenberg downgraded the stock, along with many of its peers, to “hold” from “buy.”
However, in light of the fact that vaccines are being distributed, I think that his worries about the sector’s risks are overdone. Meanwhile, his October call on SAVE stock remains correct, since the shares remain more than 45% below their 52-week high, while the company is highly leveraged to domestic-leisure travel.
Writing in late October, following the release of the company’s Q3 results, a Seeking Alpha columnist stated that “Spirit Airlines may have printed the best earnings report in the airline space this quarter, although the company’s P&L still looked ugly.”
That was an exaggeration, as Allegiant’s Q3 results were clearly better than those of Spirit. Still Spirit’s Q3 results came in ahead of analysts’ average estimates, and its per share loss was only $1.07. Meanwhile, its load factor was relatively good, coming in at 68%, and, importantly, its Q4 guidance was fairly impressive.
Spirit expects its total operating revenue in the fourth quarter to be down about 43%-45% from last year, versus its nearly 60% drop in Q3. And it expects its EBITDA margin to be a relatively strong -9% to -14% this quarter.
In Q3, the company burned an average of $2.3 million of cash per day, versus its previous guidance of $3 million. It expects to burn an average of $2 million per day this quarter, but its net debt is only $2.75 billion, versus its 2019 top line of $3.83 billion.
Southwest Airlines (LUV)
Like Allegiant and Spirit, Southwest is primarily focused on domestic leisure travel. Also like the other two airlines profiled, Southwest’s low-fare, low-cost approach should help it perform better than its rivals during the current economic environment.
Moreover, two analysts have recently issued bullish notes on LUV stock. On Dec. 7, Bernstein analyst David Vernon upgraded the shares to “outperform” and increased his price target from $44 to $59. He thinks that the company has done better than other airlines since the pandemic began, and the analyst expects the company to benefit from the FAA’s approval of Boeing’s (NYSE:BA) 737 MAX aircraft.
And on Dec. 3, Cowen analyst Helane Becker called Southwest her top 2021 pick, according to Barron’s. The airlines’ market share should rise because of other airlines’ cutbacks, while it will “benefit from a rebound in its core leisure market.” Finally, she predicted that Southwest would “return to 2019 profit levels quicker than others given their better balance sheet, share gain opportunities, and low hanging fruit on cost savings.”
Last month, Southwest reported that it experienced modest improvements in demand from August until October. The company expects its operating revenue to fall 60%-65% in November and December from last year. It predicts that it will burn $10 million to $11 million per day of cash in the fourth quarter. At the end of Q3, the company had $14.56 billion of cash, more than its $12.63 billion of debt. Consequently, it will definitely survive to see the much better times ahead.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.
