Airline Stocks: is it a Market Opportunity?

Airline Stocks: is it a Market Opportunity?

The airline industry is considered to be a crucial part of the economy. It historically moves with the economic cycles, which made multiple companies declare bankruptcy and failure due to the past downturns in the economy and caused multiple mergers and acquisitions. Today, four airlines control about 80% of the U.S. market; American Airlines, Southwest Airlines, Delta Airlines, and United Airlines.

The COVID-19 pandemic has threatened the industry, affecting its revenue to fall 90% year-over-year during the second quarter of 2020. This was due to the decline in travel demand, yet it did not lead to the declaration of bankruptcy. Moreover, a 50% of reduction in the stock value took place, not to mention that others have suffered even more as the pandemic is spreading globally with no cure, and the vaccine is still showing side effects and is not widely distributed.

Airlines have managed to raise more than $50 billion in private funding, in addition to government aids during the first half of this year.

Below are the four company stocks that dominated the market share of leading U.S. airlines for the last year.

American Airlines Group Inc (AAL)

American Airlines Group is a holding company formed on December 9, 2013, by the merger of American Airlines and US Airways. AAL provides worldwide scheduled air transportation services for passengers and cargo.

As a result of the pandemic and given the financial results of Q3, AAL decided to reduce its costs and preserve cash. It reduced its non-aircraft capital expense by $700 million in 2020 and another $300 million in 2021. This happened through reductions in fleet modification work, the elimination of all new ground service equipment purchases, and pausing all noncritical facility investments and IT projects.

Furthermore, the stock 52-week range is 8.25 and 30.78, the earning per share is -14 and the forward P/E ratio for one year is -0.85.

 
Southwest Airlines (LUV)

Southwest Airlines has issued 80.5 million shares early this year in an effort to maintain a strong balance sheet. The increase in shares means an increase in the market cap with a higher value of 1%.

At the same time, the company issued $2.3 billion of convertible debt on May 1, 2020. The stock trade is well above the conversion price of around $40 per share. Unless the company settles the convertible debt in cash at a premium, it may eventually lead to issuing nearly 60 million additional shares, to add nearly $3 billion to the market cap.

The stock’s EPS is -3.01, and its price range within 52 weeks is between 22.47 and 58.83. In conclusion, the trading level of the stock implies investors to think that the company is worth more than its initial worth early in the year; leading the stock price to get higher.

 

Delta Airline (DAL)

Delta Airlines started 2020 in the best financial position so far, which helped it deal with the pandemic with more flexibility. The company has avoided selling and reduced its assets like other carriers. The stock’s 52-week range is 17.51 and 62.48. The earning per share is -16.53 and the forward P/E ratio for one year is -3.98.

Currently, DAL largely reflects the advantaged position. Its shares are down, but less than other competitors for this year. Moreover, it can be one of the major safe legacy airlines. It is also assumed by investors that it will pick up early next year, to be one of the promising airline stocks.

 

United Airlines Holdings, Inc (UAL)

United Airlines Holdings is a holding company founded on December 30, 1968, and headquartered in Chicago. It provides air transportation services for people and cargo throughout North America and to destinations in Asia, Europe, Africa, the Pacific, the Middle East, and Latin America.

Since the COVID-19 pandemic started, UAL has been at the forefront of the industry. It delivered a three-pillar strategy of building and maintaining liquidity, minimizing cash burn, and making its cost structure changeable. Furthermore, the stock’s 52-week range is 17.80 and 90.57, the earning per share is -16.90 and the forward P/E ratio for one year is -1.82.

On the other hand, UAL was the latest carrier to cut forecasts, and its revenue is expected in Q4 to be down by 70% compared to Q4, 2019, which is slightly worse than the previous forecast. Compared to its competitors they seem to be underachieving.

 

Boeing (BA)

Boeing is a multinational corporation that designs, manufactures, and sells airplanes, rotorcraft, rockets, satellites, telecommunications equipment, and missiles worldwide.

During 2020, Boeing has suffered a sharp downturn in air travel and jetliner demand. This was due to the pandemic, and the prolonged grounding of its bestselling plane that was put in place in March 2019, after two fatal crashes killed 346 people. Boeing and its main rival Airbus are each facing a weak market for aircraft. However, the ban meant that the company cannot deliver the planes to airline customers and generate revenue. All that has caused a sharp decline in stock prices for more than 54% for this year, reporting a negative free cash flow of $5.08 billion. However, this is still better than investors' and analysts’ expectations, further than the second quarter.

In the first nine months of 2020, Boeing lost 381 orders for new planes, estimating that coronavirus could shrink the demand for the next decade. The company is aiming to turn positive cash by late 2021, but most probably it will not happen before 2022. For this purpose, the company cut almost 10% of its staff, hoping to increase it in 2021. Furthermore, it decided to reduce 30% in office space. Additionally, the company did not cut its production; however, it is monitoring it closely. 

 

The Effect of the Airline Industry on Oil

The downturn in the global aviation industry has affected the demand for jet fuel dramatically. This posed another obstacle to the oil market’s recovery.  Road vehicles’ market went back to its normal state quickly, sparking the revival in gasoline and diesel consumption once more. Most probably for fuel consumption in the aviation sector, we conclude that it will not be back to the pre-COVID level until 2025. Therefore, the weak kerosine demand has encouraged refiners to dial back the amount of jet fuel they make and pump out a surplus of diesel instead.

West Texas Intermediate futures have dropped 33% in 2020. When looking at the bright side, air cargo and domestic flights have bounced back. International journeys remain depressed and may never get back towards their previous levels. This came about since many businesses have swapped business trips to virtual meetings.

 

In conclusion

It is expected to take years for the volume of travel to be back to the pre-pandemic levels; in which investors may have to wait for their investment turnaround to be in the best-case scenario. Even though investors expect to increase the number of domestic flights, it will not be enough as prices will be sensitive to demand.

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