Illustration by Daniel Hertzberg
Airlines shares have rallied in hopes that summer travel will not be a total eradication and its rise may signal a broader recovery in air traffic.
The airlines have strengthened their balance sheets (thanks in part to the $ 25 billion in government bailouts), and they lured uneasy pilots with deep cleaning planes and increased distance between foreigners. They limit ticket sales per flight and allow passengers to re-order if only the middle seat is feared.
It seems successful. More than 1.5 million travelers passed security checkpoints from May 21 to May 25, among the highest levels since air travel was nearly jammed in March. Cowen analyst Helane Becker estimates passenger traffic to reach 400,000 per day in August – up from more than 260,000 now – and one million in December.
Airline stock is not a game of deep value like a few weeks ago. But this sector is still down 55% from a 52-week high and there might be better if we don’t get another wave of infection.
Operators that focus on domestic leisure travel tend to be some of the biggest earners of initial income. Many large companies have not yet agreed to a business trip. And consumers are more likely to take short-haul domestic flights than to book trips to Europe. “This industry might still be able to save some of the summer,” Becker said.
(ticker: LUV) seems like the safest bet in this sector. Pioneers of low tariffs built one of the strongest balance sheets leading to the crisis, having almost no net debt. Southwest has since increased cash and liquidity, and reduced expected capital expenditures – in part by delaying the delivery of Boeing 737-MAX aircraft (which still needs to be certified by safety regulators). The biggest markets in the south-west include Florida, Texas and Georgia – the states that raised locking rules earlier – and 80% of customers are vacation travelers.
Southwest sales are expected to fall more than 50%, to $ 10.8 billion, this year, compared to the total of 2019. But revenue is likely to start rising sequentially in the third quarter, and analysts see airlines turn profitable in 2021, generating $ 1 68 per share. That puts the stock at a steep profit of 19 times, but Becker has recently reaffirmed its better rating on the stock, based on Southwest’s financial strength and leisure focus.
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UBS analyst Myles Walton raised his ranking to Buy, arguing that Southwest offered “the best risk / reward” for recovery.
(SAVE) also targets the leisure market, offering ultralow rates to budget conscious travelers. The stock lost more than 80% of its value due to concerns about Spirit’s solvency and concerns that a full service operator would match its price, neutralizing its profits.
But Spirit has accumulated enough cash for the past 18 months at a current burning rate of $ 4 million per day, alleviating solvency concerns. Flight costs have stabilized and started to increase in the past four weeks, according to Deutsche Bank analyst Michael Linenberg. Spirit’s core markets, including Orlando, Florida and Las Vegas, will likely see more tourism this summer, as amusement parks and casinos are gradually reopening.
E = Estimate; Data as of 5/28/20
Even with shares rallying more than 80% from their lows, Spirit’s market value remains only $ 1.1 billion (6% of Southwest). But Linenberg views equity as an inexpensive way to bet on a rebound in profit, which he says reaches $ 2.25 per share by 2022. He has a target price of $ 24, which will value stocks with 10.7 times earnings. “You basically get the call option whether the company will successfully navigate Covid’s background,” he said.
(DAL) is more a rebound game in international markets and businesses. That won’t happen overnight. But Delta has one of the strongest balance sheets and cost structures of inheritance carriers. Its management is considered top-notch, and operators have aggressively cut costs and raised cash to get through leaner months. Its shares are traded at 10 times estimated earnings of 2021, “When Europe reopens, there will be a hidden demand for international travel,” said Becker, who ranks outperforming shares, with a target price of $ 33, implying 28% upside down from the latest prices.
Write to Daren Fonda at [email protected]
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