Airline stocks were under pressure Friday after United Airlines Holdings ” (NASDAQ: UAL) first quarter results released, providing further evidence of damage to industry caused by the COVID-19 pandemic.
Actions of United and American Airlines Group (NASDAQ: AAL) On Friday, the sector fell 7% each. Actions of other carriers, including Delta Airlines (NYSE: DAL), Southwest Airlines (NYSE: LUV), Alaska Air Group (NYSE: ALK), JetBlue Airways (NASDAQ: JBLU), Hawaiian Holdings (NASDAQ: HA), Spirit Airlines (NYSE: SAVE), and Allegiant Tourist attractions (NASDAQ: ALGT) also fell by more than 5%.
Stocks recovered part of their initial decline during the morning, but it looks like it will be another tough day for airline stocks.
After the markets closed on Thursday, United announced an adjusted loss of $ 2.57 per share on revenue of $ 7.98 billion, compared to analysts’ forecast loss of $ 3.47 per action on a turnover of 8.22 billion dollars. Sales fell 16.8% year-on-year and the company’s operating margin fell to -12.2% from 5.2% in the first quarter of 2019.
Investors knew that at the start of the earnings season, the first quarter would be bad for the airlines and the second quarter would be worse. United was particularly affected at the start of the pandemic, as it is the most exposed to Asia among all carriers based on the American continent.
“We have been at the forefront of warning about the magnitude of the impact we anticipate this crisis may have and how long we expect it to last,” said CEO Oscar Munoz in a statement. “Although we are still in the midst of this crisis, we will not hesitate to make difficult decisions that we believe will ensure the long-term success of our business. “
United’s total liquidity at the close of business on April 29 was $ 9.6 billion, of which $ 2 billion was in unused funds under its revolving credit facility. The airline said it plans to burn about $ 40 to $ 45 million in cash a day in the second quarter.
The question at the moment is how long the demand for travel and, with it, airline revenues will remain depressed. The industry has billions of cash and access to additional funds, but no capital will be sufficient if traffic does not return in the coming months.
Delta appears to have the resources to survive, and United appears to be fairly well positioned for a prolonged slowdown, but at least one Wall Street analyst is increasingly worried in the United States. Evercore ISI analyst Duane Pfennigwerth lowered his price target on the US to $ 10 from $ 10 in a research note released on Friday, saying American has the weakest balance sheet among the companies. aerial.
Although there was information on only a few airlines on Friday morning, no company is immune to the impact of the COVID-19 pandemic, and industry stocks for weeks have tended to to negotiate together.
The American is the most indebted, but far from the only airline vulnerable to a prolonged slowdown. Hawaiian has a niche network charged with costly transpacific flights and is dependent on consumers who engage in costly vacations. Spirit also has significant debt and is struggling to meet the requirements of the United States government to receive bailout funds. JetBlue entered the pandemic at the start of a transformation, and its model – offering premium service at a higher price – may not work well if the United States, as expected, goes into recession.
Airlines have entered this healthier crisis than any other time in recent history, and I hope they have every means to survive without bankruptcy. But until we have more clarity on how long the pandemic will last and what the post-virus economy will look like, it will be difficult for these shares to find a bottom.
For now, investors who want to take a risk and buy in the industry should only focus on the best names. I would recommend Delta, Southwest and Alaska, in that order.