Airline stocks have taken a severe beat down this year. Apart from tourism and hospitality, no other industry has been more devastated by the coronavirus pandemic. Most of America’s airline carriers are down between 35% and 65% year-to-date. The government has intervened to save the sector from total collapse. The $2 billion CARES Act rescue bill approved by Congress and President Donald Trump in April included $25 billion in payroll cash grants and $25 billion in loans to the airline industry according to The New York Times. The bailout, which was created as part of an economic stabilization package, enabled airlines to pay workers. The recipient airlines also agreed in principle to cease repurchasing shares and paying dividends through September 2021.
Experienced investors know that the best time to buy is when the market is red. As we approach closer to the discovery of a vaccine, it seems there is a glimmer of hope for the industry as well as its investors. For more experienced investors, this may be the best time to place bets if you do not want to be chasing a moving train.
Here, we look at 10 U.S. airline stocks where investors should buy this industry’s deep dip.
10. Alaska Air Group, Inc (NYSE: ALK)
Alaska Air Group (NYSE: ALK) has a market capitalization of $4.302bn. The stock’s YTD performance through July 27) stands at -49.62%. Alaska Air Group (NYSE:ALK) operates 115 destinations now include Boston, New York, Orlando and other major cities across the U.S., Canada, and Mexico. To survive during the pandemic, the company had to implement a company-wide hiring freeze and slash its executives’ salaries.
The company has the advantage of being a regional airline, which means that it would see an upsurge in passengers and an upward trend in revenues before other competitors. The company’s management is also skeptical of accessing bailout from the federal government because it does not want a huge debt on its balance sheet.
This may prove to be a good move in the long run because it would not have to fulfill huge debt obligations. Like its competitors, its expected recovery time is 2022.
9. United Airlines Holdings Inc (NASDAQ: UAL)
United Airlines (NASDAQ: UAL) currently has a market cap of $9.855 billion. The stock has also underperformed by the market by -63.87 percentage points for this year through July 27. In March this year, CEO Oscar Munoz and President Scott Kirby informed employees that the company was reducing its April schedules by 60%, with deeper cuts in May and June.
United Airlines incurred a loss of $9.31 per share, while its year over year operating revenues slumped by 87.1% to $1,475 million. Also, the company’s year-over-year passenger revenues fell by 93.5%. Q2 2020 reports released in June showed that the company’s cash burn averaged $40 million a day, including $3 million of principal payments and severance expenses.
Given its global footprint, United Airlines (NASDAQ:UAL) may take a longer time to attain its 2019 capacity. But that’s already being priced into the stock, which makes it as good a buy as any airline stock. The stock is expected to rebound strongly in 2021, and sustain the moment into the following year.
The carrier’s move to operate cargo-only flights in the face of declining passenger revenues paid off as revenues from the same surged 36.3% year over year. 2022 revenues are estimated to hover around $40 billion, close to 2019 levels, which were pegged at $43 billion. Like most of its industry counterparts, United’s (NASDAQ: UAL) share repurchase program grinds to a halt, which suggests that $8 in EPS is doable by 2022.
8. JetBlue Airways Corporation (NASDAQ: JBLU)
JetBlue Airways (NASDAQ: JBLU) is an airline that has carved out a niche as a low-cost provider that includes perks such as personalized in-flight entertainment. The company has a market capitalization of $2.779bn. Before the coronavirus outbreak, New York-headquartered JetBlue Airways (NASDAQ:JBLU) handled roughly 1,000 daily flights to about 100 destinations. Like its competitors, it has also been affected by the pandemic, largely underperforming the market by -45.8 percentage points.
Operating revenues of $215 million plunged 89.8% year over year. Management stated that due to various measures undertaken to combat the current pandemic-inflicted crisis, the company successfully lowered its cash burn from $18 million per day, on average, during the second half of March to $9 million in May.
The average daily cash burn in the second quarter was $9.5 million, and the daily cash burn at the end of June was just below $8 million. This was achieved by grounding more than 100 aircraft and cutting its schedule by 70%.
The airline incurred a loss of $2.02 per share. This steep year-over-year fall was due to the 91.6% decrease in passenger revenues, which accounted for the bulk (79.1%) of the top line. Revenues from other sources declined by 39.7% to $45 million.
JetBlue Airways (NASDAQ: JBLU) is an ideal stock to buy because of its low-cost, domestic flight focus. As expected, with airlines focused on domestic flights, revenues and profits will recover and normalize with impressive speed over the next few quarters.
7.American Airlines (NASDAQ: AAL)
American Airlines (NASDAQ: AAL) has a market cap of $5.96bn. The stock has underperformed the market by -59 percentage points this year through to July 27. It is one of the airlines worst hit by the effects of the coronavirus pandemic. American Airlines (NASDAQ: AAL) is one of the recipients of the federal bailout funds, receiving $5.8 billion. The management plans to plans to apply for a separate federal loan of nearly $4.8 billion.
Prior to receiving help from the government, American Airlines (NASDAQ: AAL) had an unhealthy balance sheet of $21 billion in debt versus just $3.8 billion in cash and short-term investments. The company also drew down $2.73 billion from three revolving credit facilities to help pay bills in the coronavirus downturn. American Airlines incurred a loss of $7.82 per share compared to earnings per share of $1.82 in the year-ago quarter.
American Airlines (NASDAQ: AAL) says it is cutting more than 60% of international travel capacity, including stopping 80% of its Pacific flights. It’s also delaying the start of several new routes. Analysts are bearish on this stock, most notably JP Morgan, from which it received a rare double downgrade from Overweight (the equivalent of Buy) to Underweight (the equivalent of Sell).
However, American (NASDAQ: AAL) is a big airline operator whose stock is in a position to head meaningfully higher over the next few quarters as improving growth trends converge on a significantly discounted valuation.
Driven by its cost-control initiatives, American Airlines (NASDAQ: AAL) slashed its cash-burn rate to roughly $30 million per day in June from $100 million in April. The company’s cash-burn rate in the June quarter was approximately $55 million per day, comparing favorably with its previous forecast of $70 million per day. Also, it exited the same time frame with available liquidity of $10.2 billion.
Though profit margins would drop hard in 2020 and most likely would be on life support in 2021, a full recovery is expected by 2020. Also, while the company’s buyback program essentially grinds to a halt, its share count in 2022 will be roughly equivalent to its current share count. Under those assumptions, American Airlines (NASDAQ: AAL) may be netting about $3.50 in EPS by 2022.
6. Spirit Airlines (NYSE: SAVE)
Florida-based Spirit Airlines (NYSE: SAVE) has a market capitalization of $950.2 million. The company is renowned for its low-cost, no-frills approach to flying. Its business model is hinged on offering super-low fares. But this did not prevent the stock from having a dismal performance.
The company’s YTD (through July 27) performance stands at -65.6%. It is one of the stocks which received a double downgrade from JP Morgan from Overweight to Underweight. Considering the fact that the company’s attorneys said the airline is in “survival mode,” this hardly comes as a surprise.
Spirit (NYSE: SAVE) came out with a quarterly loss of $3.59 per share. This compares to earnings of $1.69 per share a year ago. This quarterly report represents earnings of -32.96%. Spirit Airlines (NYSE: SAVE) posted revenues of $138.53 million for the quarter ended June 2020. The company has about $1.1 billion in cash against nearly $2 billion in debt. This is not a bad balance when you compare it to other airlines such as American (NASDAQ: AAL). The company has had to discontinue flights to several cities to cut costs and hemorrhage its cash burn, which is about $10m daily.
Even though its financial year has been dismal, the company is a darling of many retail traders. This is one reason why the stock is expected to see an upsurge in prices once the economy starts to function properly. Spirit (NYSE: SAVE) was one of the airline stocks that witnessed exponential growth in the market around June, before the downward trajectory of the sector. Its primary strength is its cheaper flight costs, which analysts believe would propel the stock to profitability quickly, but not before 2022. With coronavirus affecting demand significantly, low fuel prices are expected to have partly offset the adversities.
5. Azul S.A. (NYSE: AZUL)
Azul S.A. (NYSE: AZUL) may seem to have come off worse off than most airlines on this list. No government funds to bail them out of their predicament, because they are a Brazilian company. Also, its home country brazil has been severely hit by the coronavirus, much worse than the united states. Azul S.A. (NYSE: AZUL) currently has a market capitalization of $1.407bn, while its Year to date performance through July 27 stands at -72.5%.
However, despite the demoralizing indices, Azul S.A. (NYSE: AZUL) may well come about much better than expected. The company expects to peak 400 daily departures by the end of this year. Both domestic, as well as international demand and supply, increased on a month-over-month basis. Moreover, consolidated load factor (% of seats filled by passengers) inched up since consolidated traffic demand was more than the capacity expansion.
Consolidated traffic (measured in revenue passenger kilometers or RPKs) surged 43.6% on a month-over-month basis. Apart from a 27.8% rise in international traffic, the metric soared 47% on the domestic front, thereby bumping up the overall figure. Consolidated capacity ( which is measured in available seat kilometers) spiked to 37.1% owing to 43.9% and 9.7% growth in domestic and international capacity, respectively, from the past month levels.
Moreover, the company is adding six new destinations to its routes, thereby increasing its customer base. This implies that rather than taking a somewhat defensive approach like its competitors, the management is looking to benefit from the opening of the economy within the shortest time frame. This is sure to boost investor confidence and spur a wave of bullish sentiment on the stock. Azul S.A. (NYSE: AZUL) believes that bookings would increase by 290% by 2020 Q2.
4. Southwest Airlines (NYSE: LUV)
Based in Dallas, TX, Southwest Airlines is a passenger airline that provides scheduled air transportation in the United States and ‘ten near-international’ markets. Incorporated in 1967, Southwest Airlines (NYSE: LUV) currently has a market capitalization of $19.173bn. The stock YTD (July 27) performance stands at -42.2%. To adjust to the current economic situation, Southwest Airlines (NYSE: LUV) has had to cancel 1,500 daily flights. The company undoubtedly is the best airline stock to own now.
The company has a consistent track record of profits and a healthy balance sheet prior to the outbreak, Southwest Airlines (NYSE: LUV) was one of the most financially healthy stocks. Southwest Airlines (NYSE: LUV) had more than $4 billion in cash and short-term investments versus just $1.3 billion in debt. It is no surprise that its shares have fared better than the competition. The pandemic may be a long-term opportunity for Southwest (NYSE: LUV) to gobble up share once normal travel resumes.
The company would recover quicker than its counterparts, most probably by 2021. This is because the company is focused on domestic travel, which would rebound well before international travel. In 2019 alone, the company realized $22.4 billion in revenue, a figure it could replicate by late 2021 if the vaccine falls through.
3. Hawaiian Holdings, Inc.(NASDAQ: HA)
Hawaiian Holdings (NASDAQ: HA) has a market capitalization of $605.164m. The stock’s year to date performance through July 27 is -55.1%. To trim down its workforce and reduce its cash burn, the management is proposing some measure of voluntary action such as early retirements.
Hawaiian Holdings (NASDAQ: HA) came out with a quarterly loss of $3.81 per share versus the Zacks Consensus Estimate of a loss of $3.72. This compares to earnings of $1.23 per share a year ago. This quarterly report presented an earning of -2.42%. A quarter ago, it was expected that this parent company of Hawaiian Airlines would post a loss of $1 per share when it actually posted a loss of $0.74.
Hawaiian Holdings (NASDAQ: HA) is one of the airline companies that qualified for the government bail-out. Based on its valuation, Hawaiian Holdings (NASDAQ: HA) qualifies for a 360m loan. However, the decision on how much would be drawn from this loan facility would be taken by September according to a statement by the company’s CEO Peter Ingram in an interview with CNBC.
This raises speculation that the company may not want to incur much debt and maintain a healthy balance sheet. Though its YTD passenger travel fell by 16.3%, Hawaiian Holdings (NASDAQ: HA) expects to startup flights to its North American routes on August 1. The airline will be operating an average of 252 weekly flights connecting Hawaii to the U.S. mainland and 114 daily flights within the Hawaiian Islands.
While the company may not be able to pursue international flights, the early start of domestic flights would bring up the company’s revenue, which is estimated to pick up by 72.3% by 2021, implying that the stock has a lot of room to grow. Purchasing the Hawaiian stock now means you would be paying a reasonable price for it.
2. Delta Air Lines (NYSE: DAL)
Delta Air Lines (NYSE: DAL) has a market cap of $16.718b. Its YTD (July 27) performance stands at – 56.5%. Prior to the coronavirus pandemic outbreak, (NYSE: DAL) operated more than 5,000 flights to more than 300 destinations around the world, a figure which seems like a distant past.
Delta Air Lines’ (NYSE: DAL) March revenue plummeted by $2 billion year-over-year, and the company is currently burning more than $60 million in cash every day. The company’s shares are trading at their lowest levels since 2013. Even Warren Buffett, seems to have lost faith in Delta Air Lines (NYSE: DAL) as he cut Berkshire Hathaway’s (NYSE: BRK.A) stake in the stock by 18%.
However, there is still reason that Delta Air Lines (NYSE: DAL) would attain its pre-COVID levels. As one of the world’s largest air carriers, the stock is too cheap to ignore. This means that there is a lot of room for the stock to grow.
A fundamental rebound in air travel would offset this year’s shortcomings, following a strong recovery process starting from 2021. Delta’s (NYSE: DAL) ability to generate cash flow in normal times should help the stock in its recovery.
1. Mesa Air Group, Inc. (NASDAQ: MESA)
Mesa Air Group, Inc. (NASDAQ: MESA) currently has a market capitalization of $113.68M. The stock’s year to date performance through July 27 stands at -63.5%. The company’s block hours declined 68.6% in May due to reduced schedules during the COVID-19 outbreak.
Mesa Air (NASDAQ: MESA) came out with $0.05 per share for the quarter ended March 2020 compared to earnings of $0.46 per share a year ago. The company also posted revenues of $179.90 million for the quarter ended March 2020 against revenues of $177.15 million.
The company has consistently topped analyst revenue estimates two times over the last four quarters. Empirical research shows a strong correlation between near-term stock movements and trends in earnings estimate revisions.
Based on this premise, Mesa Air (NASDAQ: MESA) is a good stock for momentum investors because it has a lot of room to grow after the pandemic is worn out.
Disclosure: None. This article was originally published at Insider Monkey