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Airline stocks were rallying Wednesday after seven carriers received another lifeline from the government, closing on billions of dollars in loans from the U.S. Treasury. The stocks appear to be rising on hopes that Congress will extend payroll support for the industry, potentially averting a wave of layoffs that could come on October 1, after payroll support under the Cares Act expires.
The NYSE Arca Airline Index was ahead about 4% in morning trading, recovering some territory after posting sharp losses last week.
The industry has been lobbying for an extension of the Cares Act’s Payroll Support Program, which expires today. House Democrats included funding for airlines in their latest $2.2 trillion stimulus proposal, unveiled Monday, and the White House is urging Congress to approve more aid for the industry. A vote on the House bill may come later this week, though it’s unclear if House and Senate leaders will come to terms in time to avoid widespread layoffs—which airline executives have said could top 100,000 jobs.
Treasury Secretary Steven Mnuchin urged Congress to approve more financing for the industry on Tuesday. The Treasury said it had closed on loans for seven carriers:
Alaska Air Group
American Airlines Group
(AAL), Frontier Airlines (FRNT),
(SKYW), and United Airlines Holdings (UAL). “We call on Congress to extend the Payroll Support Program so we can continue to support aviation industry workers as our economy reopens and we continue on the path to recovery,” Mnuchin said in a statement.
American secured the largest loan, worth up to $7.5 billion, partly because
Delta Air Lines
(LUV) declined to take loan allocations under the Cares Act.
Against this backdrop, analysts say investors should stick largely with domestic-oriented carriers focused on the leisure market.
Raymond James analyst Savanthi Syth raised her price targets on Alaska,
(ALGT), SkyWest, and Southwest on Tuesday, reiterating Strong Buy ratings on each. Syth increased her target on Alaska to $50 from $43. Allegiant went to $152 from $135, and SkyWest to $45 from $42. Syth’s new target on Southwest is $45, up from $42.
“We continue to prefer airlines with a larger share of domestic/leisure travel,” Syth writes. She also increased her target on Delta, taking it to $38 from $36, reiterating a Strong Buy. Delta looks appealing as a play on a recovery in business demand, she writes, and she likes the stock for Delta’s flexibility in managing labor and aircraft ownership costs.
Bernstein analyst David Vernon also reiterated favorable views on Delta, rating it Outperform. Delta is less exposed to coastal markets where unemployment among high-income workers is taking a big hit, and it is more exposed to markets like Georgia, Utah, and Missouri, which have stronger prospects on the jobs front, he writes. Southwest has similar route exposures, though Vernon rates it Market Perform.
One longer-term positive for the industry is carriers have cut capacity so deeply—down more than 50% from pre-crisis levels—that in 2021 they should be able to start pivoting from stimulating demand with cut-rate fares to managing their networks and revenue yields.
Some data indicate that pricing may be improving as well. According to Deutsche Bank’s latest fare tracker, Allegiant and JetBlue saw one-way fares for near-term travel increase around 12% over the last week, with Florida airfares continuing to show strength. Domestic advance-purchase fares for five of the nine airlines that Deutsche Bank tracks also showed week-over-week increases, including gains at Hawaiian, Allegiant, and American.
Analysts expect leisure travel to continue driving the recovery, while business demand takes longer to rebound. That will reduce the contribution of high-margin business fares to airlines’ revenue mix. But the industry should see some improved pricing power in a broad-based recovery.
“The market should rebalance quickly as higher-income leisure travelers look to get away from a miserable 2020 and some business travel begins to return,” Vernon writes. “Managing up capacity to meet demand should fast-track the industry’s ability to manage up revenue quality once we have a line of sight to a recovery.”
Write to Daren Fonda at [email protected]