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All Contents © 2020The Kiplinger Washington Editors
By Patrick Sanders, Contributing Writer
| April 15, 2020
Few industries have suffered more in 2020 than airline stocks. The COVID-19 coronavirus outbreak has slammed the brakes on air travel, and as a result, most of America's airline carriers are down between 35% and 65% year-to-date.
But there's some hope for airlines. The $2 billion CARES Act rescue bill approved by Congress and signed by President Donald Trump last month included $25 billion in payroll cash grants and $25 billion in loans to the airline industry. And on April 14, Washington and many of the country's airlines had reportedly agreed in principle to terms of the hobbled industry's bailout. Few details were available, but one thing we do know is airlines that accept bailout funds will have to cease repurchasing shares and paying dividends through September 2021.
Dividends or not, the country's best airline stocks might be presenting a big bounce-back opportunity. Dwain Phelps, founder and CEO of Phelps Financial Group in Kennesaw, Georgia, is among those who looks for airlines to recover as soon as the medical community can devise a way to test people for the coronavirus at airports.
"I think there's room for individuals to take advantage of this because (airlines) will respond," he says. "Once we have those factors in play, I think people are going to go back to flying consistently again."
Here, we look at eight U.S. airline stocks for clues into where investors should buy this industry's deep dip. Not all airlines are created equal. And given how dire the current situation is, investors might be picking between stocks that could take off and companies that might cease to exist in a few years.
Data is as of April 14.
Market value: $5.1 billion
Year-to-date performance: -58.4%
American Airlines (AAL, $11.95) is receiving $5.8 billion in federal bailout money, and it plans to apply for a separate federal loan of nearly $4.8 billion.
AAL entered this crisis with a rough balance sheet featuring almost $21 billion in debt versus just $3.8 billion in cash and short-term investments. And the company recently drew down $2.73 billion from three revolving credit facilities to help pay bills in the coronavirus downturn. Needless to say, the government's help was welcome.
American says it is cutting more than 60% of international travel capacity, including stopping 80% of its Pacific flights. It's also delaying the start of several new routes. Before the pandemic, American offered more than 6,800 daily flights to 365 locations in 61 countries. Analysts expect the slowdown in service to result in a $2.07-per-share loss during the first quarter, versus a 52-cent profit a year ago. The full-year 2020 picture is even worse, at a projected $12.34-per-share loss versus $4.90 earned in 2019.
American certainly isn't alone among airline stocks seeing downgrades, though analysts seem particularly bearish on AAL. Over the past three months, the stock has earned seven Sells versus five Holds and just three Buys. Particularly ugly was a rare double downgrade from JPMorgan analyst Jamie Baker, who dropped AAL from Overweight (equivalent of Buy) to Underweight (equivalent of Sell).
"In our opinion, the margin for error for American management to navigate this crisis outside of the courts is growing uncomfortably thin," he writes. And his assumptions on a potential recovery and American's debt imply a "negative equity value."
Stifel Nicolaus analyst Joseph DeNardi also recently downgraded AAL stock, from Hold to Sell. He writes that if air traffic is suspended into the summer, American could be forced to become a smaller airline with reduced capacity and routes.
Market value: $7.6 billion
Year-to-date performance: -64.9%
United Airlines (UAL, $30.90) CEO Oscar Munoz and President Scott Kirby told employees in a late-March message that the company cut April schedules by 60% and to expect deeper cuts into May and June. Before the pandemic, UAL operated about 4,900 flights per day to 362 locations.
"And, based on how doctors expect the virus to spread and how economists expect the global economy to react, we expect demand to remain suppressed for months after that, possibly into next year," the executives wrote. "We will continue to plan for the worst and hope for a faster recovery but no matter what happens, taking care of each of our people will remain our No. 1 priority."
United, which confirmed it had reached an agreement with Washington but did not release any details, also is considering selling frequent-flier miles to credit-card partner JPMorgan Chase (JPM), according to The Wall Street Journal. Sacrificing future revenue for a lesser return today is a tough pill to swallow, but that's where airline stocks are these days.
Ryan Giannotto, director of research at GraniteShares ETFs, says United was a top name in the airline space before the coronavirus hit, and that makes it a top choice to rebound.
"Going into this, they had much stronger-than-expected earnings growth," Giannoto says. "If you look at the top S&P 500 names, they were in the top quintile for expected earnings growth. Additionally, they had stronger revenue growth.
"Obviously, the coronavirus has thrown a massive wrench into all of this and now all airlines are trading like distressed assets," he says. "But those that are better positioned with stronger fundamentals may be better positioned going forward."
And broadly speaking, analysts appear to have rosier opinions about United than American, with six saying Buy, seven saying Hold and no one calling UAL a Sell over the past three months.
Market value: $15.7 billion
Year-to-date performance: -58.0%
Delta Air Lines (DAL, $24.54) operated more than 5,000 flights to more than 300 destinations around the world before the coronavirus. However, it has been forced to cut 70% of its capacity and ground 600 planes. March's revenue declined by $2 billion year-over-year. The company believes second-quarter revenue will plummet 90%, and it's currently burning more than $60 million in cash every day.
It's a brutal situation – one that has DAL shares trading at their lowest levels since 2013.
Even the Oracle of Omaha himself, Warren Buffett, has seen his affinity for DAL wane. Buffett's Berkshire Hathaway (BRK.B) recently pulled back on DAL stock, cutting its stake by 18%. This comes just a few weeks after he said he wouldn't be selling airline stocks. In fact, Buffett actually added more Delta shares to the portfolio in February.
Some managers and analysts are more bullish, however.
"We're trying to look through the coronavirus issue and see what will work on the other side," says Keith Gangl, a portfolio manager at Gradient Investments. "People were flying before and people will be flying in the future. We think this is an opportunity for investors to be putting money to work."
Citi analyst Stephen Trent (Buy) agrees. He recently lowered his price target on DAL shares from $57 to $33, citing short-term weakness, However, Trent believes Delta's ability to generate cash flow in normal times should help the stock in its recovery, and that financing "could help bridge the carrier to better times."
Market value: $17.7 billion
Year-to-date performance: -35.6%
Southwest Airlines (LUV, $34.78) was among the best airline stocks, financially speaking, heading into 2020. The company had more than $4 billion in cash and short-term investments versus just $1.3 billion in debt. No surprise, then, that LUV shares have held up far better than the competition.
Nonetheless, Southwest isn't without its issues. The company has had to cancel 1,500 daily flights and executives are looking to trim costs. Analysts expect it to lose 38 cents per share in Q1 versus a 70-cent profit last year. For 2020, they're projecting a $2.84-per-share loss versus last year's $4.45 profit.
So, the company still will accept federal bailout money – some $3.2 billion, including a 10-year, low-interest loan of $1 billion.
Of note, Berkshire also unloaded some of its Southwest stake of late – about 2.3 million shares for $74 million. But that represents a mere 4% reduction, indicating the sale might have been more geared toward slimming Berkshire's stake to below the 10% threshold that triggers increased regulatory scrutiny and unwanted headaches.
Southwest boasts a consistent track record, strong profits and a better balance sheet than its larger peers. In fact, Cowen analyst Helane Becker argues that the outbreak might be a long-term opportunity for Southwest to gobble up share once normal travel resumes. "(Southwest is) arguably the most successful airline of all time and has survived through other crises and come out stronger," she writes.
Market value: $3.8 billion
Year-to-date performance: -54.2%
Alaska Air Group (ALK, $31.05) is among several regional airline stocks that should receive bailout funds. Alaska Air, a large regional carrier based out of Seattle, primarily serves the western U.S. and Alaska. However, its 115 destinations now include Boston, New York, Orlando and other major cities across the U.S., Canada and Mexico.
Alaska Air disclosed in a recent regulatory filing said that demand is down 80% in April and May. The company already had announced plans to reduce its capacity by 70%.
"Given the uncertainty about when demand may bottom out and when a recovery may begin, the CARES Act payroll support grants will be critical as we weather the challenging months ahead," the company said in a statement.
Alaska Air is expected to complete its agreement with the Treasury Department this week, according to a New York Times report, but no details were immediately available about the size of the bailout. That said, Alaska was in a relatively more stable position than some of its peers, at $1.5 billion in cash versus roughly $1.3 billion in long-term debt.
Meanwhile, the pros see ALK losing $1.08 per share in Q1, versus a 17-cent profit in 2019, and $3.14 per share for all of 2020, whereas it gained $6.42 in 2019. Regardless, Alaska has received more Buys (five) than Holds (four) over the past quarter, including a pair of upgrades from Deutsche Bank and JPMorgan. The latter still sees a slow recovery, calling it a "multi-year affair, resulting in the material shedding of aircraft and headcount along the way."
Market value: $950.2 million
Year-to-date performance: -65.6%
JPMorgan's Jamie Baker had another double downgrade to dole out recently, reducing Spirit Airlines (SAVE, $13.88) from Overweight to Underweight. That can't be much of a surprise, given that the airline's own attorneys recently said the company is in "survival mode."
Spirit is a Florida-based airline known for its low-cost, no-frills approach to flying. Its business model is built on offering super-low fares (often the lowest on offer), but then squeezing as much as it can from customers in the form of fees. Want an assigned seat? That's a fee. Checking a bag? That's a fee. And if you waited to pay to check your bag at the airport, rather than when you booked, that's a larger fee. You can carry a bag onto the plane – but if it's larger than a purse or a backpack, guess what? That's a fee, too.
Spirit will even charge you $10 to print out your boarding pass at the airport.
All of this is to drive home the point that Spirit counts its pennies carefully. And that makes SAVE stock particularly perilous in a downturn that experts say could be more dangerous for the airline industry since Sept. 11, 2001.
Spirit has about $1.1 billion in cash against nearly $2 billion in debt – not treacherous, but far from ideal. Interestingly, though, Spirit wasn't included in the Treasury's list of airlines it had made an agreement with, though the company said it expects "to agree on terms soon." A sticking point might be that Spirit wants to discontinue service in several cities, requiring it to get an exemption from a rule making airlines ineligible for bailout funds if they don't maintain normal service to cities it otherwise would.
One potential glimmer of hope for SAVE shareholders: Once people begin hitting the skies once more, Spirit could see an uptick in usage by travelers looking to fly on the cheap during an economic squeeze.
Market value: $2.5 billion
Year-to-date performance: -50.6%
JetBlue Airways (JBLU, $9.24) is among the freshest faces on this list, having started service in 1998. Before the coronavirus hit, New York-headquartered JetBlue handled about 1,000 flights a day to nearly 100 destinations. The airline has carved out a niche as a low-cost provider that nonetheless includes some perks, including personalized in-flight entertainment.
But being one of the best cheap airlines hasn't exempted it from the pandemic slowdown. JBLU chief Robin Hayes says the company is burning through $10 million per day – and that's after grounding more than 100 aircraft and cutting its schedule by 70%.
"Just a few weeks ago, we couldn't get new aircraft fast enough to hit our growth plans," Hayes wrote in an April memo. "Now, we are taking steps to sit down the aircraft we have."
JBLU had about $1.3 billion in cash versus $1.9 billion in debt at the end of 2019. It has since borrowed the full $1 billion from an existing loan facility to help it make ends meet. JetBlue told the NYT it should receive $936 million in bailout funds, $251 million of which will be in loans.
Analysts might be picking winners and losers when it comes to most airline stocks, but they're mostly staying on the sidelines with JetBlue. Seven analysts have called it a Hold over the past three months, versus just one Buy and no Sells. Several of those Holds are downgrades, however, including from JPMorgan, Stifel Nicolaus and UBS.
Market value: $1.3 billion
Year-to-date performance: -54.6%
Last up is Allegiant Travel (ALGT, $79.08), which operates as Allegiant Air – a low-cost airline based in Las Vegas that serves 125 destinations. Like Spirit, Allegiant makes its living by keeping fares low and heavily charging for baggage and other fees.
The No. 9 air carrier in the U.S., Allegiant recently withdrew its full-year 2020 guidance after disclosing that it expects revenue for March to be 40% to 45% lower than last year, and that it expects to cut airline capacity by as much as 90% in April and May.
"The outbreak of coronavirus is having an impact the likes of which we've never seen in the travel industry. Even as a domestic carrier, to have zero demand across almost every community we serve is truly unsettling," Allegiant chairman and CEO Maurice Gallagher wrote in a release. "With the situation changing daily, we are taking proactive steps to ensure operations continue, protect the livelihoods of our team members, and put us in the best possible position to serve our customers when demand for travel returns."
Allegiant, which has applied for bailout funds, is bleeding $2 million a day. That's worrisome given the company's balance sheet, which pits $458 million in cash and short-term investments against $1.1 billion in long-term debt.
Interestingly, ALGT has been mostly immune to analysts' waning optimism for airline stocks. For instance, while Stifel Nicolaus and Deutsche Bank were downgrading several other carriers, they maintained their Buy calls on Allegiant. In all, the stock has four Buys, versus one Hold and one Sell.
Patrick Sanders was long DAL as of this writing.