Company / Analytics

Analytics, 09 June 2020

Airline and travel industry stocks. What's behind?

Airline stocks soared last week with some rallying by more than 20%. The airline industry has never been immune to global disasters and together with the BEACH industries — booking, entertainment, airlines, cruises, and hotels – has been most affected during the Covid-19 season. As early as March, airline prices had fallen by nearly 25%, a decline that by then was greater than that recorded at a similar time during the SARS crisis of 2003, according to the International Air Transport Association (IATA). What does last week’s surge in the airline and global travel stocks signify for the industry?

Shares of top airline stocks soared on Thursday last week after American Airlines announced plans for July, during when it plans to rebuild domestic capacity to 55% of 2019 levels and international flights to 20%, amid a rise in demand and lifting of Coronavirus restrictions. Shares of American Airlines Group surged a record 41% to close at $16.72, on Thursday, the stock’s biggest one-day percentage gain since the current company was formed by a 2013 merger with US Airways.

United Airlines also announced plans to add back flights, while taking a more cautious approach that includes resuming about 130 nonstop routes in July that were suspended when travel collapsed as the coronavirus spread rapidly. The rally is likely to continue this week as travel stocks - airlines, hotels, and cruise lines - and retailers tied to the opening of the economy have seen an increase in activities, even though bookings are still down.

But analysts expressed skepticism that the big moves reflected anything more than a short squeeze, as investors who had bet against the stocks bought shares to cover their positions. For instance, in the case of American Airlines, Credit Suisse’s Jose Caiado noted that the airlines share price reaction is confounding, observing that while the carrier’s summer schedule announcement was a sign of improving demand, it certainly wasn’t incrementally positive to the tune of a 41% ($16.72) move in the share price. Moreover, investors shouldn’t lose sight of American’s $40 billion total debt load, including more than $28 billion in long-term debt, and high-single-digit leverage ratio, based on 2021 estimates. As the company will need to dig out of its debt, earnings are likely to remain negative next year.

While travel is gradually resuming, the lack of business travel puts some downside risk on price point, while ambitious load factor targets could create social distancing concerns for most airlines. Load factors refer to the percentage of a flight’s seats with ticketed passengers, an element that is likely to impact initial domestic and international flight travel.

Meanwhile, Boeing stocks soared from the optimism about the reopening of the economy. Shares were recently trading at $230,50, on pre-market trade on Tuesday, up 12,26% for the day. Seaport Global Securities initiated coverage of Boeing with a buy rating, saying the worst of pandemic-related risk is now priced in. The firm set a 12-month price target of $277 for the planemaker, which would translate into a more than 30% gain from Boeing’s close on Friday of $205.43. Shares of Boeing have risen 54% in the past month, trimming its 2020 losses to about 36%, according to CNBC. Boeing stock is still down by nearly 30% since the start of the year—and 48% from its March 2019 record. The company’s shares lost more than two-thirds of their value from February to March as the pandemic led governments around the world to impose travel restrictions, air traffic collapsed and lockdown measures roiled the global economy.

While top aviation industry executives said it will take years for travel demand to return to pre-pandemic levels, the recent surge suggests that the worst of the coronavirus crisis may be over. The rallies will keep building on recent strengths in the market, driven by economic reopening and better-than-expected economic data which have pushed the major averages higher.

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