Is it safe to buy airline shares now?


Airlines were hit hard by the COVID-19 pandemic, causing stocks to plummet and forcing Warren Buffett to report to the emergency exits. Airlines are trading in assessments today that suggest they may not survive, and many prominent industry observers fear they will not.

Boeing, which relies on airlines for most of its income, expects the worst. In a TV interview on May 12, CEO David Calhoun said that a “large US carrier” would “most likely” go bankrupt this year, predicting a prolonged decline in travel.

“Something will happen when September arrives. Traffic will not return 100%, it will not even return 25%, “said Calhoun. said. “Perhaps by the end of the year we will approach 50%. So there will certainly be adjustments that will have to be made by the airlines. “

LUV graphic

Cumulative airline data by YCharts.

Calhoun may end up being right, although I don’t think bankruptcy is obvious. However, it seems likely that traffic will not return to pre-pandemic levels for years, and there is a significant risk to airlines. This risk will remain until we know more about how the pandemic is resolved and what the economy looks like when it is.

I don’t think the airline industry is investable right now, but I think investors need to understand the risks and choose carefully between carriers. Here is an overview of the US sector after profits, broken down by level of risk for investors.

Safer to buy

The first thing to note is that if traffic just doesn’t come back, either due to another wave of epidemics, economic hardship, changing consumer preferences or a combination of the three, no company aerial is not safe. There are very few companies that can survive indefinitely with little income, and certainly no airline that can.

However, in something other than the worst case, and even in the slow recovery of Calhoun in the fall and 50% at the end of the year, there are airlines which seem to have the means to survive definitively.

Southwest Airlines (NYSE: LUV) the shares have only lost half their value since the start of the year, making the company a winner among airline stocks. The airline has long been an investor favorite because of its simple business structure and its ability to make money when others cannot – Southwest has never resorted to layoffs, even after the September 11 attacks.

That could change by the end of the year if traffic doesn’t come back, but whatever the conditions, Southwest has a fortress record. The airline also took more than one surgical knife from its schedule rather than massive cuts. This allows him to continue selling during this period with little demand, and the strategy should help him be among the first airlines to see real evidence of a turnaround.

The southwest consumes between $ 30 million and $ 35 million a day, but it still has levers to pull, including parking more planes if conditions get worse. Hopefully it won’t happen to that, but Southwest is a safe bet for being the last airline standing in almost any nightmare scenario.

A Delta A321 taking off from the runway

Image source: Delta Air Lines.

Delta Airlines (NYSE: DAL) has earned a reputation as an innovator in the sector since its exit from bankruptcy over ten years ago, by reorganizing prices to better compete with discounters and by investing in foreign partners as a cost-effective way to provide global coverage . Delta also paid a dividend as of this year, a rarity among the major airlines.

The pandemic has wiped out the dividend and forced Delta to cut back on its global plans, but there is still much to love about this company, including its high-level management team. In recent years, Delta management has redefined what a “legacy” airline is, and assuming the company is going through the crisis, I expect its leaders to use it as an opportunity to continue. to rethink how the airline works.

Delta aims to end the current quarter with $ 10 billion in cash, and has billions of unencumbered assets at its disposal if it needs to raise more money.

Alaska Air Group (NYSE: ALK) is smaller than the southwest or the delta, but the airline has a strong franchise all over the west coast and has always been a leading operator. The company and the stock took a hit in the past decade as Alaska purchased and integrated Virgin America, but that process was ultimately almost complete and, as the pandemic approached, Alaska was taking a flawless approach to cut roads that were not performing to focus more resources on its main strengths.

Alaska has nearly $ 3 billion in cash, enough to survive for more than a year at current burn rates, although it has about $ 600 million in debt maturing in the first half of 2021. The management of the airline believes that the company can reach the breakeven point of cash burns at the end of the year, which could mean that they expect a possible reduction in the workforce.

The argument for buying Alaska is that the company, with its simple structure, should be able to bounce back faster than some other airlines as traffic returns.

Better to wait

There are also several airlines which I think are likely to survive, but they carry additional risks and should be avoided at this time. United Airlines Holdings (NASDAQ: UAL) has approximately $ 10 billion in total liquidity and plans to burn between $ 40 and $ 45 million per day by the end of the quarter.

United was seen as an impressive turning point by 2020, with inventory up more than 580% in the previous decade thanks to a cost-cutting campaign and better ticket pricing that helped increase margins. But the airline is also dependent on the energy and technology sectors due to its hubs in Houston and San Francisco, and United is going through the crisis while undergoing a previously planned management transition.

The airline could be a tempting option on Delta or Alaska if investors were offered a real deal in exchange for taking the extra risk. But the company’s stock hasn’t dropped much more sharply than its rivals’ stocks, and United is actually trading at a profit premium multiple over Delta.

United also has a history of work problems and has been most direct with employees in anticipating future problems. He also recently encountered hiccups in the debt markets.

JetBlue Airways (NASDAQ: JBLU), meanwhile, is a much smaller airline, but it is also doing what it can to stem the waste of money and weather the storm. The company has $ 3.1 billion in total cash and plans to reduce daily cash consumption by $ 7 million to $ 9 million by the third quarter. Management has delayed its planned capital spending by the next few years by approximately $ 1.3 billion until later in the decade so that it can focus on survival and repayment of the debt. debt.

JetBlue has the resources to survive, but the business model of the business works best in times of economic boom, not recessions. At the start of the crisis, JetBlue focused on its Mint product, which offers high-end equipment for higher prices. Even with the return of traffic, the airline appears to be a bad candidate to outperform its competitors assuming that we are headed for a slowdown.

A line of JetBlue queues parked at an airport

Image source: JetBlue Airways.

Hawaiian Holdings (NASDAQ: HA) is a niche carrier dependent on tourism to a high-cost destination, and the Hawaiian Islands and the airline rely on Asia for a significant portion of their volumes. International travel, for both US and foreign passengers, is expected to return more slowly than domestic travel. By its very nature, Hawaiian has a larger footprint, as much of its flights are transpacific long-haul.

For this reason, Hawaiian can do everything right and is still struggling to survive a recession. I think it will survive, but until the economy bounces back, it will be difficult.

Generic cards

There are a few airlines that require special attention during this crisis. American Airlines Group (NASDAQ: AAL) was the last of the majors to restructure, and it remains behind its peers in terms of redesigning prices and operations. He also has a high level of debt in the industry. American predicts that liquidity will reach $ 11 billion by the end of the second quarter, and I think it can survive, but if a major airline succumbs to bankruptcy, American is the most likely bet.

An American Airlines jet coming out of a hangar

Image source: American Airlines Group.

Spirit Airlines (NYSE: SAVE) also has a lot of debt, and the small size of the business makes balancing cut flights more difficult and still remains in line with government directives to continue service in order to receive bailout funds. But if Spirit can survive the immediate crisis, its low-cost structure should help it better compete in what is likely to be a recessionary environment, at a time when airlines generally offer lower fares to try to stimulate demand.

Finally, Allegiant Tourist attractions (NASDAQ: ALGT) operates a good airline and has a solid cost structure, but in recent years the company has diversified into resort development, hotel management, golf and the ownership of a chain of family entertainment centers . These companies, which are in various stages of development, could weigh on cash balances and divert management attention, particularly if post-pandemic collection restrictions remain in place.

The entire airline industry will face additional turbulence in the coming months. Investors wishing to board should choose carefully, buckle up and be prepared for a long journey.


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