If you haven’t noticed – and it’s hard to imagine how anyone could have missed it – the news hasn’t been great for airlines lately
Here’s just a sampling of recent headlines:
Dozens of Boeing 777s grounded after United Airlines engine failure – Feb. 22, CNBC online
Airlines plan to ask passengers for contact-tracing details – Feb. 21, Associated Press
Airlines Still Don’t Know When Passengers Will Return – Feb. 19, The New York Times
Airlines’ latest challenge: Rising jet fuel prices – Feb. 19, CNBC online
A Leisure Travel Recovery Is Being Held Back By A Lack Of Standardized Testing And Foreign Entry Rules – Feb. 18, FORBES.com
U.S. airline passenger traffic fell last year to lowest number since 1984 – DOT – Feb. 16, Reuters
U.S. House committee approves another $14 billion for pandemic-hit airlines – Feb. 11, Reuters
Airlines warn employees they could be furloughed at the end of March – Feb. 4, The Washington Post
Airlines, labor unions push for a third round of federal aid with travel demand still depressed – Feb. 4, CNBC online
Vaccination Passports And Covid-19 Tracking Apps Could Trigger More Travel, But It Might Not Be Enough – Feb. 2, FORBES.com
The 6 Largest U.S. Airlines Lost A Whopping $35 Billion In 2020 – Jan. 28, FORBES.com
The Last 10 Months Wiped Out 21 Years Of Air Travel Growth – Jan. 4, FORBES.com
So, what happened yesterday to airline stocks?
They went “Boom!”
Deutsche Bank analyst Michael Linenberg issued advice to investors early Monday suggesting that the time now is right to buy U.S. airlines now that the number of new Covid-19 cases, hospitalizations and deaths are declining sharply in the U.S. and that vaccination rates are trending nicely in the right direction. And in response, shares of the nine U.S. carriers Linenberg addressed specifically in his note jumped sharply in early trading before the market’s official open, and remained up all day despite some of those shares falling back a from their morning highs.
By the market’s close, the U.S. Global Jets ETF JETS was up 3.46% at 25.68. That’s the highest it’s been since Feb. 27 of last year.
Individually, American Airlines’ stock was the biggest winner on the day, rising almost 9.5% to $20.44 a share, the highest it has been in 362 days. Delta share were up 4.5% to $47.74, the highest price for that stock in 361 days. Southwest shares gained 3.75% to $54.79, the highest close in more than a year. United shares closed at $49.79, up 3.5% and topping the company’s June 8 peak amidst a short-lived period of exuberance prior to the realization that a much-hyped summer recovery wasn’t going to happen after all. JetBlue’s shares jumped 6.3% on Monday to close at $18.49, the highest closing price in 362 days. Hawaiian Airlines’ shares rose 7.7% to close a new 1-year high of $26.40. Alaska, Spirit and Allegiant airlines all had similar though slightly less dramatic one-day gains on Monday.
Of cours, this juxtaposition of big stock price increases against such a huge sea of negative headlines, gives rise to two rather big, but obvious questions
One, is Linenberg nuts? And two, what the heck are investors pushing up airline stocks thinking?
In answer to the first question, no, Linenberg, a veteran airline analyst who is well regarded both on the Street and in airline circles, isn’t nuts. He’s just doing his job the old-fashioned way.
In his note, Linenberg essentially “called a bottom” to the entire segment’s market woes by saying “we are of the view that all of our (followed airlines) could see material upside from current (share price) levels.” He’s not the first Wall Street analyst to turn positive on airlines, but he’s certainly the biggest name analyst, and the one from the biggest Wall Street house to do so far. And, if you believe that airlines stocks still are the same ol’ “trading stocks” they’ve always been – as opposed to the more conventional “buy-and-hold” or “value” shares industry leaders spent the last half of the 2010s trying to convince us they finally had grown up to become – Linenberg is doing his job the way it used to be done prior to 2008 and the onset of the Great Recession. Thereafter, analysts played things very cautiously while much of the industry went through the throes of bankruptcy and consolidation. And once the industry began to emerge from that period, analysts began evaluating carriers almost, sorta, kinda like real companies; you know, where balance sheet strength, quality of assets, and long-term planning are given more attention than debt load and available cash because neither of those last two categories constitute a concern.
Now, it’s clear that airlines aren’t – and never really were – “mature” companies whose stocks should be evaluated as such. So Linenberg is playing the role of race track tout, predicting that these nine horses are primed to win or compete seriously in their next few races this season. Other touts/analysts may or may not agree – most assuredly, some don’t. But making such predictions, which just so happen to drive up trading activity in the touted stocks, always was the job of an airline analyst, at least until a dozen or so years ago.
To be sure, carrier executives tried to convince Wall Street that airlines were no longer mere trading stocks in which market gamblers, market timers and investors with high tolerance of risk could jump in and out several times a year in hopes of turning several quick profits by buying low and selling high in just a matter of months.
Most famously, American Airlines CEO Doug Parker argued in October 2017, just three-a-half years ago, said publicly, “I don’t think we’re ever going to lose money again. We have an industry that’s going to be profitable in good and bad times.”
It was a foolish statement then – as noted here and in many other publications – unless one naively believed that airlines really were mature companies no longer subject to wild swings in the economy, geo-politics, labor disruptions, or, as we’ve learned in the last 12 months, global pandemics. And now it has been proven to have been a foolish statement. The last round of airline consolidation in the late 2000s and early 2010s, the very strong U.S. and global economies in the last half of the 2010s, and surging demand for air travel in Asia and other fast-developing regions combined to drive airlines to record profits and seeming economic stability. That gave rise to claims like Parker’s, who mistook an exceptional, extended up cycle for permanent, positive change.
Alas, airlines have shown us once again that they remain, well, airlines; permanently hair-triggered to spiral into chaos by any one of dozens of global or regional disruptions from big swings in the price of oil, to interest rates’ reaction changing economic policies, to the spread of deadly micro-organisms across the globe.
So Linenberg, and a couple of others, are making a call that the airlines will probably see better days immediately ahead in light of what he sees as positive signs that travel demand will rise in the months ahead.
That’s not the same as predicting that the airlines will come roaring back this summer to the way they were in 2019 and be long-term, stable winners.
In fact, in broad terms, they continue to operate at only around 50% to 55% the scale at which they were operating in 2019, and their revenues continue to be only around 40% to 45% of what they were then, yet they’ve only be able to shed about 25% to 30% of their costs. That’s why the six largest U.S. carriers collectively lost almost $35 billion last year. Nobody sees those tremendously ugly numbers being completely turned around this year. Indeed, many still believe the U.S. and the global airline industries would recover all the way back to their operational levels of 2019 until 2024 or 2025. Who knows if they’ll ever return to their peak profits performance of the mid-2010s?
But what Linenberg’s tout of nine U.S. carriers’ shares tells us is that once again those looking to invest in airlines should view those companies and quick-turn “trading” stocks; or, essentially, short term stocks on which those with a stomach for such risk can gamble. Is he right? Is he wrong? Who knows?
That’s why some call it gambling.