Is There A Case For Investing In Airlines?

Airline stocks, having had a record-breaking decade, are now seen as nothing more than flying petri dishes of infection. Should you ever invest in them again?

Whenever I used to travel, my girlfriend would force me to pack disinfecting napkins and promise to wipe my area down immediately upon sitting. I would scoff and mock but I would catch a cold nearly every time I didn’t do it. Today, thanks to the highly contagious COVID-19 pandemic, it’s almost impossible to fly as airlines have drastically reduced their routes and schedules. 

This has battered revenue and stock prices, causing even Warren Buffett to drop his airline investment, which was worth $4 billion in December. The airlines turned to the government for assistance and got it conditionally in the form of $25 billion of the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, with an additional $25 billion available as low-interest loans for general expenses. Stipulations for receiving the payroll-only grants include no furloughs or reduction in pay for staff until October, cessation of dividend payments and stock buybacks. Is there any hope remaining for this industry and if so, should you buy in?

The state of airlines

Smaller airlines like Hawaiian Air (NASDAQ: HA) and Sun Country Airlines will likely go under or be purchased by the bigger players. The top airlines that will probably survive the crisis are American (NASDAQ: AAL), Delta (NYSE: DAL), United (NASDAQ: UAL), and Southwest (NYSE: LUV). 

The pandemic has affected business travel, forcing companies to resort to online meetings via Zoom (NASDAQ: ZM) and similar tools; this will likely be the post-pandemic norm, limiting further travel and expenses for companies and thereby decreasing ticket sales. With unemployment rates skyrocketing, people won’t be able to use disposable travel income for vacations for some time as well. 

The road to recovery will be long and slow for these reasons; but how long? As with other matters related to the pandemic, the world looks to China, ground zero of the outbreak, for indication. There, in the past 2.5 months, domestic air travel has doubled and is down only 33% year-on-year. China Eastern Airlines (NYSE: CEA) plans to resume 70% to 80% of flights by the end of June and more through August.  In the U.S., Delta’s CEO Ed Bastian predicts three years before a sustainable recovery citing customer trust and finances as driving forces. 

Are people ready to fly in close proximity to others and do they trust the airlines to do what’s right in preventing contagion? A tweet from a recent complimentary flight for medical professionals on United documents a fully-packed vessel with mask-wearing passengers, even though the company stated that it would block middle seat bookings on their flights. This doesn’t bode well for an industry already being decried by the public for focusing on its bottom line, charging fees for things like baggage and seat selection, and declining customer service.

What’s the damage to airlines?

Here’s a breakdown of the top players and the damage done:

Airline Daily Cash Burn (in millions) CARES Amount (in billions) Loss (in millions) Capacity Reduction
American $70 $4.1 $2,200 80%
United $45 $3.5 $2,100 80%
Delta $50 $3.8 $534 70%
Southwest $35 $2.3 $94 50%

As the number one airline in the U.S., American should be okay, but the real surprise here is Southwest with the lowest cash burn, loss, and capacity reduction of the four, as well as the one receiving the least aid. The reason for this is that it has limited restrictions as it doesn’t fly to high-risk areas and as a result will have a leg up on the competition in terms of safety, hospital-level hygiene protocols, and HEPA air-filtration systems.

On the safety front, Southwest is also limiting the number of passengers per flight, Delta is blocking its middle seats, and United is taking it a step further by not allowing customers to book seats next to one another. Investors are rightly worried, especially when the Oracle of Omaha, a huge proponent of holding stocks and purchasing when the chips are down, sells his entire airline position. Interestingly enough however, the US Global Jets ETF (NYSEARCA: JETS), with its top holdings in the big four airlines, has had a 1,600% increase in its assets as it fortified its position in the companies.

I think the fund managers have the right idea as the airlines are too essential to fail, and the U.S. government will ultimately prevent that from happening. With this perspective, I feel that the airlines are a safe and inexpensive investment.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above Read our full disclosure policy here.