What happened
Airlines are green on Thursday, a day off for broader markets as investors are slowly warming up to the sector as the earnings season continues. The companies are posting losses in the second quarter, as expected, but they all seem to have clear plans to overcome the coronavirus pandemic without running out of cash.
Actions of United Airlines Holdings (NASDAQ: UAL) They traded up to 10.9% at noon on Thursday, while the shares of American Airlines Group (NASDAQ: AAL) peaked at 9.2%, Spirit airlines (NYSE: SAVE) gained 7%, and Delta airlines (NYSE: DAL) negotiated up to 5.5%. The sector returned some of those gains as the afternoon wore on, but all four airlines increased at 3:30 p.m. EST, even as the S&P 500 was down more than 1.4%.
And that
The pandemic hit airlines hard, with travel demand nearly evaporating in April and only slightly recovering in the months that followed. Second-quarter industry revenue has declined 80% or more year-over-year, and with new cases skyrocketing in many parts of the country, airlines plan to reduce hours further as the summer ends.
Image source: Getty Images.
Investors know that airlines are going to lose money for at least the next few quarters. The question is, do companies have the means to overcome the pandemic without burning cash reserves? And while nothing is certain, the earnings season so far has raised confidence levels that the industry is stronger than initially feared.
United, American and Spirit reported earnings in the past 24 hours, and neither gave any reason for investors to believe that the sky was falling.
- American reported that second-quarter revenue fell 86% year-over-year, but said it had reduced cash burn to $ 30 million per day in June from $ 100 million in April. Most importantly, it has $ 10.2 billion in available liquidity and more money from government loans and other financing.
- United’s revenue decreased 87% year-over-year, and the company said it expects cash burn to drop to $ 25 million per day in the third quarter from $ 40 million per day in the second quarter. United ended the quarter with $ 15.2 billion in liquidity, and expects liquidity to grow to $ 18 billion by the end of the third quarter.
- Spirit’s revenue fell 86% year-over-year, and cash burn fell to $ 1.5 million per day in June from $ 9.5 million per day in April. The company, which is much smaller than American or United, ended the quarter with $ 1.2 billion in liquidity and announced on Thursday a new stock offering of 20 million shares to further boost that total.
Delta released earnings last week that were well received by investors, and appears to be getting a fresh boost on Thursday as a new round of earnings reports is digested.
Now what
Bankruptcy is not yet completely off the table, because we don’t know how long the pandemic will last or what the economy will look like once it is finally over. Airlines have done a good job increasing their cash reserves, but no company can survive this environment indefinitely, and even when it ends, it will take years to rebuild the industry balance sheets hit by additional debt.
At best, the industry is facing a multi-year shift, and travel demand is not expected to return to pre-pandemic levels until 2022 at the earliest.
For those who want to buy and are ready to wait for the turbulence, I advise you to buy the most stable companies in the industry. For me that is Delta Southwest Airlinesand Alaska Air GroupNot the names that fly highest on Thursday.
