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U.S. Airline Shares Rally on Easing Coronavirus-Led Travel Bans

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·5 min read
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After months of a virtual shutdown, countries around the globe are opening up businesses, easing travel bans and relaxing social distancing norms.

With easing travel restrictions, airlines, battered by coronavirus-induced slump in travel demand, are seeing modest increases in passenger count. Earlier this month, United Airlines Holdings UAL, carrying a Zacks Rank #3 (Hold), in a SEC filing stated that as of May 18, it witnessed a reduction in cancellation rates and a “moderate improvement in demand” in domestic markets as well as some international routes for the remainder of the second quarter of 2020. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Due to the coronavirus-led demand drop, the airline industry plunged more than 54% since the beginning of February, against the S&P 500 index’s 8.2% decline.

Price Performance Since February


 

However, the airlines gained some ground yesterday on relaxations in air travel and a steady rise in passenger count over the past few weeks.

Easing Travel Restrictions in Europe Lift Airline Stocks

Airline stocks namely Delta Air Lines DAL (up 13.1%), American Airlines AAL (up 14.8%), United Airlines (up 16.3%), Alaska Air Group ALK (up 12.9%), Southwest Airlines LUV (up 12.6%), Spirit Airlines SAVE (up 23%), JetBlue Airways Corporation JBLU (up 14.3%) and Hawaiian Holdings HA (up 13.2%) surged yesterday primarily on news that a German travel operator TUI AG plans to resume flights by June-end. The NYSE Arca Airline Index also rose 10% at the close of business on May 26.

Additionally, effective Jun 3, Italy is expected to permit travel between some select European countries. Moreover, Germany and Greece are expected to open up their borders, starting Jun 15. Meanwhile, Spain will allow foreign tourists from July, removing the two-week quarantine rule for overseas travelers.

TSA Data Shows Increasing Trend in Passenger Numbers

Data from Transportation Security Administration (TSA) shows that 340,769 passengers went through TSA checkpoints on Memorial Day. Although the figure represents an 86.4% decline from the year-ago number, it indicates a more than 100% surge from the lows in April. Moreover, the number of travelers has been rising steadily over the past few weeks. This uptrend in passenger count also drove investor confidence in airline stocks.

Southwest in the Spotlight

Although the signs of recovery are a positive for all airline stocks, Southwest seems to be in a more advantageous position among U.S. airlines. UBS analyst Myles Walton is quite bullish on the Southwest stock and feels that it offers the “best risk/reward” to play a domestic travel recovery. Walton raised the stock’s rating to buy from neutral. This is the only stock that he is bullish about.
 
Walton feels Southwest is “best positioned” to tide over the crisis as it has a “clean balance sheet with relatively low leverage.” Notably, total debt-to-total capital ratio, which is an indicator of a company's leverage, stood at 0.42 and 0.3 for Southwest at the end of the first quarter of 2020 and at the end of the fourth quarter of 2019, respectively. The readings compare favorably with the industry’s respective figures of 0.69 and 0.62. Moreover, cash and equivalents at Southwest stood at $5,545 million at the end of the first quarter, way above the current debt figure of $3,125 million, implying that the company has enough cash to meet its short-term debt burden. Southwest should also be able to deal with the low demand environment better as its business is dependant largely on domestic travel, per the analyst.

Per Walton, “We expect the industry recovery profile to stretch to 2023/24 but see LUV on the recovery post ’20 as having the best shot at getting back to pre-crisis earnings and cash flow.”

Conclusion

Although air travel demand is slowly improving, a rebound in airline stocks seems far off. Despite lifts in travel restrictions, most customers are likely to remain wary of air travel at least for a while now as coronavirus concerns continue to evolve. However, airlines are dealing with the crisis efficiently through stringent cost-cutting measures.

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Southwest Airlines Co. (LUV) : Free Stock Analysis Report
 
JetBlue Airways Corporation (JBLU) : Free Stock Analysis Report
 
Delta Air Lines, Inc. (DAL) : Free Stock Analysis Report
 
United Airlines Holdings Inc (UAL) : Free Stock Analysis Report
 
American Airlines Group Inc. (AAL) : Free Stock Analysis Report
 
Alaska Air Group, Inc. (ALK) : Free Stock Analysis Report
 
Spirit Airlines, Inc. (SAVE) : Free Stock Analysis Report
 
Hawaiian Holdings, Inc. (HA) : Free Stock Analysis Report
 
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