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Stocks  | August 25, 2020

Truth be told, if there’s a rally in the airline industry, United Airlines (NASDAQ:UAL) is going higher. In fact, UAL stock may even be one of the better performers in a strong rally. 

The same goes for American Airlines (NASDAQ:AAL). These two have been some of the worst performers in the group. So if and when there is a rally, these stocks are likely to have stronger recoveries on the upside. 

Despite that, I don’t want to own United or American. Instead, I would rather be with higher quality names like Delta Air Lines (NYSE:DAL), Southwest Airlines (NYSE:LUV) or Spirit Airlines (NYSE:SAVE).

The Airline Struggle Is Real

Spirit has been one of the worst performers in the group from a stock perspective. Despite that, the company  drastically cut down its cash burn and will likely be one of the first to turn profitable when business returns to the airlines. 

Southwest has one of the strongest balance sheets in the group. When there are times of uncertainty, investors are drawn to certainty. In this case, strong balance sheets translate to certainty, which is why Southwest stock boasts the best year-to-date return (down 37%) of the group. 

The next best performer? Delta, which is down 53%. That says a lot about how much better LUV stock is doing than its peers. 

In any regard though, the airline industry is under immense pressure. While TSA checkpoint traffic rebounded sharply from the April lows through June, we’ve seen it plateau since July. There have been two days of upward spikes in traffic this month, but nothing that suggests the trend is changing. 

This image is a visual for that TSA traffic reference. As you can see, there just isn’t any momentum to the upside. Perhaps that will change with a dip in novel coronavirus cases. But what if the case count increases? Will traffic dip again or will it remain resilient? 

The bigger question is, how long will it take for the airline industry to recover? Delta’s management says a few years. United said it “expects demand to remain suppressed until the availability of a widely accepted treatment and/or vaccine for COVID-19.”

Breaking Down UAL Stock

When United Airlines reported earnings in July, the company suffered an 87% decline in revenue. That’s about in-line with its peers. United called it “the most difficult financial quarter in its 94-year history,” as it reported an adjusted loss of $2.6 billion. 

On the plus side, it doesn’t appear that we need to worry about a liquidity event. At the end of the quarter, total liquidity stood at $15.2 billion. By the end of Q3, that figure should stand at $18 billion, according to the company. 

In Q2, United experienced an average cash burn of $40 million per day. For Q3, management expects that figure to drop to $25 million per day. Is that good news? I guess compared to the prior quarter, but it’s not a great situation. 

Air travel is not going away, but until demand picks up, these stocks may continue to bumble along without much traction. 

Have a look at the chart above. Since rebounding from the May low (where UAL stock formed a nice double bottom) and topping out in June, shares have been chopping in a sideways pattern. It’s between $30 support and $40 resistance, as UAL stock clings to the 50-day and 20-day moving averages. It is literally in the middle of the range.

The Bottom Line

On a dip, see that $30 holds as support. Below the June low at $29.23 and we could see more selling pressure, potentially down toward $25.

On a rally, see if UAL stock can clear $40. That puts the June high near $49 and the 200-day moving average in play. 

If I’m forced to own something in the airline space, I’d stick with Delta, Southwest or Spirit at this time, though.

A revolutionary initiative is helping average Americans find quick and lasting stock market success.

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