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American Airlines’ stock is flying higher as investors look to signs that the economy is beginning to recover—and flight demand with it.
The airline stock surged Thursday, then again led the S&P 500 higher on Friday morning, trading up roughly 15% for a two day gain of over 60% by midday. Fellow airlines United Airlines and Delta Airlines were also up over 13% and 8% respectively by midday.
The boost in airline stocks comes as states begin to reopen and restrictions start loosening. That’s led several companies including American Airlines to announce they are boosting flight capacity in the coming months. American Airlines said Thursday it plans to fly 55% of its domestic schedule and 20% of its international schedule in July—a massive boost from last month, when it only flew 20% of its schedule from the previous year in May.
“We’re seeing a slow but steady rise in domestic demand. After a careful review of the data, we’ve built a July schedule to match,” Vasu Raja, senior vice president of network strategy at American Airlines, said in a press release. The announcement pushed the airline’s stock up over 40% on Thursday—it’s best one-day boost ever.
In fact, those trends in increasing load size are what Burkett Huey, an aerospace analyst at Morningstar, call “the most encouraging sign.” Yet he sees it “more as limiting 2020 losses—that’s the positive news,” he told Fortune. According to Huey, American’s stock is higher on Friday due to “the recent load factor trends, which are indicating that people are getting more comfortable flying than they were just two months ago.”
Flights have been modestly increasing in recent weeks, with nearly 400,000 passengers passing through TSA checkpoints on Thursday, according to TSA daily data (still a yawning gulf from its year-ago period, which saw over 2.6 million).
Meanwhile, US Global Jets, an airline exchange-traded fund with the ticker JETS, has seen a massive surge in assets in recent months, boosting its inflows from $33 million in March to over $1 billion, helped in part by its recent popularity on trading platform Robinhood.
But the recent optimism comes off a period of heavy battering for the industry amid world-wide shutdowns due to the coronavirus, which had seen many big airlines, including American, shave over 60% off their market caps by April. And while some big names are slowly clawing back losses, there are still massive headwinds the big airlines are facing—including on their balance sheets.
Indeed, some analysts think stocks like American Airlines have hit their heights, and note the bounce may be due to a short squeeze of investors covering bearish bets. “The news flow is likely to remain favorable as demand (primarily leisure) continues to recover into the summer and before focus shifts to 4Q risks (i.e., business demand recovery, second wave of infections),” Raymond James analyst Savanthi Syth wrote in a note. “However, taking into consideration the additional debt during the current crisis, we view [American Airlines] as priced close to perfection … which potentially invites an equity issuance to address the highly levered balance sheet.” Syth also downgraded the stock from market perform to underperform.
Other analysts are taking bearish tones, as Credit Suisse’s Jose Caiado remarked in a note that “AAL’s share price reaction is confounding,” pointing to the airline’s debt load “that the company will need to dig out of,” while Citi’s Stephen Trent wrote in a Thursday note that “ambitious load factor targets could create social distancing concerns.”
With big challenges facing the airline industry, including the heavy debt load, “When stocks move 20%, 30% in a day, there’s a whole lot less of a margin of safety if your underlying estimates on what that enterprise value is is incorrect,” notes Huey.
Yet as countries and states begin to reopen, some are watching signs that the economy on the whole is beginning to heal. “American consumers, workers and business leaders all share the desire to be in a better place. That journey appears to have begun,” Mark Hamrick, senior economic analyst at Bankrate.com, said in a note Friday following the unemployment report—which saw unemployment decline in May, coming in at 13.3% versus 14.7% in April. In fact, that’s enough for others like Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, to declare, “as long as [the unemployment rate] continues to move lower, it will show that the re-opening of the economy is proceeding smoothly,” he wrote in a note Friday.
Airline analysts like Morningstar’s Huey suggest improvements in unemployment would likely impact the airline industry, but warns that, “at this point, there’s a whole lot of uncertainty in what’s going on now.”
The big question is when—if ever—air travel will fully recover.
When Fortune recently surveyed Fortune 500 CEOs about whether “Business travel will become less frequent, replaced by video conferencing,” 91% agreed. And analysts like Huey are “less optimistic” that business travel, which he describes as “substantially more profitable” than leisure, would bounce back before a vaccine is available.
Yet some industry insiders don’t foresee all doom and gloom. One former industry leader recently told Fortune, “The major carriers will be 10% to 20% smaller than they are now,” in the future. “In the near term, it will be ugly. We’ll see painful restructurings, but probably not bankruptcies for the majors.”
