Winners and losers are emerging in airline stocks

  • By Daren Fonda,
  • Barron's
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Shares of Spirit Airlines (SAVE) have surged more than 9%, after the carrier said it could furlough up to 30% of its staff this fall.

The news and Tuesday’s move for the stock seem to fit a pattern. With demand looking weaker, investors want to see airlines cut costs dramatically, and carriers that do so may be rewarded with higher share prices.

Spirit said in a filing on Monday that an increase in demand it saw in June and July has since reversed due to the rise in coronavirus cases and state-imposed quarantines.

“It’s now clear that the demand increase we saw in June was an outlier, and the downward trend will continue,” Spirit said in a memo to employees last week. The airline now expects flight capacity to be down 35% in August and 45% in September. That represents a deterioration from July when the airline’s capacity was off 18% from the same period a year earlier.

The airline has now burned through more than $700 million in cash in the last five months and expects to go through another $100 million each month for the next several months, it said. “This level of cash burn is not sustainable,” Spirit said.

The upshot is that Spirit warned employees that it may furlough 20% to 30% of pilots, flight attendants, and other staff in October, after payroll support it is receiving under the Cares Act expires.

Spirit’s second-quarter earnings fell short of Wall Street’s expectations, and its stock has taken investors on a roller-coaster ride. The stock plunged to a low of $7 a share on March 19, hit a high of $25.94 on June 5, and has since settled back to around $16.80. Spirit has been one of the strongest performers relative to its low point, gaining more than 137%.

While every airline stock is down by double digits this year, there are some stark contrasts. Low-cost carriers focused on the leisure market are generally outperforming the full-service legacy airlines. And with demand trends now looking shakier, due to the rise in virus cases and quarantine measures, investors are focusing on carriers that may be able to cut costs fastest.

One of the sharpest contrasts in the charts is between Allegiant Travel (ALGT) and United Airlines (UAL)—the best and worst performers year to date.

Allegiant is down 36% this year versus a 63% fall for United. Allegiant focuses almost entirely on leisure travel, while United flies international and domestic routes, deriving much of its profit from business and travel overseas.

Both airlines plan to furlough employees this fall, after payroll support under the Cares Act winds down, and they have both made deep cuts to their schedules to conserve cash. But Allegiant seems to be soldiering on a bit better, in part because its low-cost model made it more profitable heading into the crisis. The company generated operating margins of 19.8% in 2019, nearly double United’s 10.5%.

Southwest Airlines (LUV) stock has also held up better than average, with a loss of 41% year-to-date. The stock didn’t fall as precipitously as other carriers, so its rebound has been more muted, at around 32% off its lows in mid-May. Southwest’s rock-solid balance sheet and leisure focus have propped up the shares, though they are now down around 25% from trading highs around $42.35 in early June.

Among the Big Three carriers, Delta Air Lines (DAL) has fared best, down 56% this year, while American Airlines Group (AAL) is off 60% and United is in the rear with a 63% decline. Delta’s balance sheet isn’t as stressed as American’s, and the airline was more profitable heading into the crisis than either American or United.

Delta has also been relatively conservative about adding back capacity and limiting seating to maintain more physical distance between passengers. American and United aren’t limiting seat capacity.

Nonetheless, the close bunching of the Big Three airline stocks indicate that investors remain skeptical that they can carry on at anywhere close to their current flight schedules. Deep cuts to capacity and employment are likely coming this fall.

That may be what is needed to recoup some of the losses in the stocks.

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