Can Airline Stocks Survive Another Wave Of Covid-19?
Why are airline stocks down today? The stock market today brings back fresh flashbacks of what the market experienced during the coronavirus induced sell-off in March. Why now? A second wave of the pandemic pulled the trigger. That’s not totally unexpected if you ask me. Airline stocks have been climbing so much in hopes of a travel recovery. Prior to this week, shares of most US airline stocks have been showing some signs of recovery as most people are getting all excited to fly again.
However, this week is not in favor of airline stock investors as most airline shares are in the red for three consecutive days. This came after a rise in the new Covid-19 in tourism hotspots. Some investors fear this could be the start of a second wave of the pandemic. With fresh cases surfacing across the states, this could delay some of the summers plans travelers originally had in mind. We never know if a lockdown is going to be implemented again if there’s a continuous spike in cases again. This is concerning for airlines because the existing demand is already weak. Thus, the resurgence in the number of cases could potentially weigh down on airline stocks further.
Oil Price An Indicator Of How Airline Stocks Would Perform
Now, just when the market is starting to seem somewhat stable, Covid-19 strikes again. This has investors scrambling, with oil prices seeing their biggest daily decline since April 27th. Once again, oversupply and the lack of demand have taken center stage. When there’s oversupply, that automatically tells us that there’s weak demand from the transportation industry.
The transportation sector accounts for the largest share of US petroleum consumption. While a lower oil price is usually good news for airline companies, this doesn’t do any good for now because there’s very low consumption. Rather, the weak oil price could be seen as an indication of how the travel industry, specifically airline stocks and cruise stocks could perform in the short term. With that being said, let’s take a look at a list of airline stocks that are making ‘big moves’ this week.
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Top Airline Stocks To Watch Next Week: Delta Air Lines
First on the list, Delta Air Lines (DAL Stock Report) is the most discussed airline stock this week. The company is expected to be grounded by debt, and that’s not a nice thing to hear. The company said that it is seeking to renegotiate debt terms with lenders. If not successful, there would technically be a default on the loans. The airline has enough liquidity to cushion the impact of Covid-19 for some time, but not for too long. While the company successfully raised more than $10 billion through various credit facilities, it can only buy them time to survive through the storm.
From the company’s filing, Delta expects to see revenue down 90% in the second quarter ending June 30. Also, the company doesn’t expect to satisfy minimum “fixed charge coverage ratios” for its debt obligations by early next year. Therefore, the best bet for Delta is to find a way not to default on their credit agreements by obtaining amendments before breaching these covenants. Now, Delta is already bringing some of the planes back to the sky. The company will need to have a steady passengers stream for its cash flows to be sustainable.
Shares of Delta Air have been sliding over concerns of resurgence in Covid-19 cases and mounting debt problems. The DAL stock reached a one-month high of $37 per share on 8th June. Since then, DAL stock has plunged more than 20% and last traded at $27.2. With an expected slow and steady rise in domestic demand, and now the resurgence of cases, can we still expect Delta Air to make a comeback in the next few months?
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Top Airline Stocks To Watch Next Week: American Airlines
American Airlines Group (AAL Stock Report) traded lower this week because the market still views bankruptcy as a risk. Like other airline stocks, American will need to have a rebound in traffic to ensure its survivability before cash fully burns out. During the beginning of June, investors were hopeful as more passengers were flying domestically, which then led to a surge in airline stock prices. For instance, passenger levels have returned to 16% of 2019 levels with June 7 traffic reaching 441,000.
The airline just dipped back to $14 on fears of a second virus wave. The good news from the airline is that American expects to bring its daily cash burn rate down to $40 million by the end of June, ahead of its $50 million per day target. There is a chance domestic flight could return to 20% of last year’s level or more in June. Separately, a lower cash burn rate could help the company avoid falling to liquidity issues. Things seemed to be picking up quite well for American. But given the uncertainty with the pandemic, it is impossible to say for sure. However, AAL stock has plenty of upside remaining considering the stock traded at $30 prior to the coronavirus pandemic.
For investors who want to buy into the aviation industry, would it be better to limit the exposure to a small part of your portfolio? Maybe it’s wise to focus on the airline companies that stand the best chance of surviving whatever is ahead. In any case, the stocks would likely need more time to return to their good old days.