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Airline Stocks on the Mend: Is a Comeback Possible Soon?

Maharathi Basu

After being paralyzed for months by dwindling air-travel demand due to the coronavirus-fueled crisis, aviation stocks are finally having something to cheer about.

The most recent boost came from the airline heavyweight, American Airlines AAL on Jun 4. This Zacks Rank #3 (Hold) Fort Worth, TX-based carrier announced that it will push up its capacity for July owing to improving trends for air-travel demand. The update naturally pleased investors, leading to a 41.25% surge in the carrier’s stock price to $16.74.

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In fact, the positivity was not limited to American Airlines alone since it appreciated the share price of other industry participants as well. Notably, Delta Air Lines DAL, United Airlines UAL, Southwest Airlines LUV and Spirit Airlines SAVE gained 13.7%, 16.2%, 5.1% and 21.4%, respectively, yesterday. With most industry players exhibiting an uptrend, the NYSE ARCA Airline Index rallied 10.12% to close Thursday’s trading session at $62.94.

American Airlines’ Plan of Action

With passenger demand slowly returning to normalcy, management at American Airlines stated that it intends to operate 55% of its domestic scheduled flights in July 2020 compared with July 2019.  In fact, with travel restrictions easing, the airline saw an uptick in travel demand in May as well. Notably, Vasu Raja, the carrier’s senior vice president of Network Strategy, said that “We’re seeing a slow but steady rise in domestic demand”.

Evidently, the company flew nearly 110,000 passengers per day on average in the last week of May. The reading marks a 71% jump from the total 32,000 passengers carried per day on average in April. As a result of the bounce in traffic on American Airlines’ flights, the load factor (% of seats filled by passengers) soared to 55% in the last week of May from a mere 15% in April.

What is more encouraging is that international demand is also seeing a recovery, albeit at a slower pace. As a result, American Airlines aims to operate nearly 20% of its internal flights scheduled for July compared with July 2019. The move to drive its domestic as well as international capacity will automatically augment the carrier’s systemwide capacity for July, which will be near 40% of last year’s level.

Notably, beginning Jun 4, American Airlines resumed its services to eight international destinations including flights from Dallas-Fort Worth to Amsterdam, Paris and Frankfurt. More international flights are anticipated to restart operations in the coming days, again highlighting the rebound in air-travel demand.

AAL Joins the Bracket of Other Airlines
 

The gain recorded by the NYSE ARCA Airline Index was not restricted to Jun 4 only. With demand gradually resurfacing, the index has rallied 29.5% in the past week. This upward movement of the index is owing to the wave of optimism spread by various industry participants.

Recently, United Airlines management stated that it intends to add more international flights in July. The schedule for next month, even though down 75% from its usual levels, shows a marked improvement from May and June. In fact, the carrier also benefited from a spike in June bookings. Echoing similar sentiments last month, Southwest Airlines officials stated that on the back of an upbeat demand scenario, new passenger bookings are lately outpacing trip cancellations. While June operating revenues are estimated to decrease in the 80-85% band, capacity is projected to contract between 45% and 55%. Load factor is estimated in the 35-45% range. Expectations for June indicate improvement from the actual data for April. In April, operating revenues plunged in the 90-95% range. Load factor was a dismal 8% while capacity dropped 58%.

Meanwhile, Latin American carrier Azul AZUL raised its June capacity following a better demand scenario. Evidently, the carrier expects to operate 168 scheduled flights per peak day in June compared with 115 in May and 70 per day in April. Moreover, Azul aims to run flight services to 57 domestic destinations in June compared with 38 and 25 cities served in May and April, respectively.

The fact that the Zacks Airline industry has rallied 33.3% over the past month bears testimony to this bullish scenario.


Wrapping Up

Even though the resurgence of passenger demand to pre-coronavirus levels is still a distant possibility, the recent increase in bookings witnessed by many carriers buoys hopes. The relaxations pertaining to air travel and the visible spurt in passenger count are quite a boon for the industry, which has been one of the worst-hit corners in the pandemic-imposed crisis.

With the ongoing summer season, the gradual upturn in traffic bodes well for carriers, most of which incurred losses in the March quarter due to shrinking passenger revenues. However, only time will tell whether this momentum in the airline stocks turns out to be short-lived or not. Come what may, we expect investor focus to remain on this topical issue.

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AZUL SA (AZUL) : Free Stock Analysis Report
 
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