What happened
I’ve been saying for a while now that as long as the COVID-19 pandemic dominates headlines, airlines will likely trade as a group, focusing on hints about future demand, instead of just based on company-specific news. On Tuesday morning we saw an illustration of this phenomenon.
On Tuesday shares of United Airlines Holdings (NASDAQ: UAL), American Airlines Group (NASDAQ: AAL), en Delta Air Lines (NYSE: DAL) all traded more than 5% based on positive comments from Southwest Airlines (NYSE: LUV), yet Southwest shares do not climb as high as shares of their rivals.
So what
Airlines have been a free fall due to the pandemic, with revenues down 80% or more year-over-year and customers refusing to take to the skies. The entire sector fell early in the pandemic, and in the months since, stocks have largely traded in tandem based on positive or negative headlines surrounding the pandemic and how long it may take for travel demand to recover.
Image Source: Getty Images.
A proof of registration from Súdwest on Tuesday showed an increase in shares of airline. The company said it feels good enough about its liquidity and access to private capital to forget a government aid program that its CEO had previously “pretty much messed up”. Southwest also said it saw improved demand for leisure in August and went to September, helping lower its estimate for third-quarter average daily cash burn to $ 20 million from $ 23 million.
Southwest has a domestic-oriented network, and for decades now the airline has been among the leaders in share for entertainment. But the markets on Tuesday interpreted good news from Southwest on demand as good news for the entire sector, pushing their key rivals higher as well.
Well what
There are plenty of clues to this game of optimism. While Southwest feels good enough about its financial position not to take the government loans, others, including Americans, have indicated that they intend to tap the government for further liquidity.
And even if the demand has improved a bit, the overall outlook is still low. Southwest expects third-quarter assets to decline by 30% to 35%. That is worse than its previous estimate for a decline of 20% to 30%. When summer ends, some of that demand for entertainment will increase. Southwest expects capacity to be 40% to 50% in October compared to 2019.
The good news is that thanks to the government lending program and private markets, the entire sector has a substantial job of resisting the worst of the pandemic without running out of cash.
The sector, given enough time, will recover, and I am optimistic domestic bankruptcies can be prevented. But the view is still far from certain, and the recovery will take time. For now, it’s best for investors to focus on Southwest and other companies that are well positioned for the downturn and avoid buying riskier names.
