Some Wall Street analysts say it's time to add airlines to your portfolio now that it appears they have weathered the worst of the coronavirus pandemic.
"It's a matter of letting the vaccine distribution play out," American Airlines Chief Revenue Officer Vasu Raja told Yahoo Finance Live. "Demand is currently at between 40% to 45% of its 2019 levels, our revenues trail that may be about 30%. But every day is a little bit better."
American (AAL) stock is up 30% year-to-date and up 67% over the past six months. At Delta (DAL) shares are up 20% year-to-date and 75% over the past six months. United (UAL) is up 15% and 51% for the same time periods while Southwest (LUV) is up 22% and 61%.
Raja said American Airlines sees the recovery building in real time with increased bookings to leisure destinations but he cautions that there is still a long way to go. "Almost every day we see searches for airplane tickets grow. The challenge is that we don't see conversions (ticket purchases) growing at nearly the same rate and so we do sense pent up demand that's out there," Raja said.
Ready to take off
Wall Street sees it, too. Analysts at Deutsche Bank recently raised their price targets and ratings from Hold to Buy on all of the major carriers as well as Alaska Air (ALK), JetBlue (JBLU), Hawaiian (HA), Spirit (SAVE), and SkyWest (SKYW).
"We have observed numerous instances of pent up demand for air travel, particularly around peak periods and peak travel days underscoring our view that consumers want to travel," Deutsche Bank analysts told their clients.
Cowen airline analyst Helane Becker told her clients in a recent note, "We thought by now we would regularly be seeing 1 million to 1.2 million people traveling every day and are disappointed we are still mostly between 900K and 1.1 million." But Becker expects the trend to pick up heading toward Easter. "We are also focused on Memorial Day weekend, the unofficial start to summer, and are estimating we will be seeing between 1.1 million and 1.4 million people traveling every day," Becker said.
At Raymond James, analyst Savanthi Syth told her clients recently, "There is greater confidence of a recovery in leisure/VFR (visiting friends and relatives) demand in the summer due to greater availability of vaccine/testing capacity. Moreover, there is encouraging survey data for an eventual recovery in business demand."
Syth said the airlines are now plotting ways to capture market share as the recovery builds. That includes deals like the codeshare agreement American Airlines announced last week with JetBlue. It will add more than 30 destinations to American's schedule while allowing the airline to control expenses. Raja explained that historically American operated 16 trips daily between New York City and Chicago. "Unsurprisingly, there's not enough demand," he said.
But the deal with JetBlue gives customers more destinations via connections within the partner airlines service hubs. "By having these partnerships, we can combine the best of things that American Airlines does, which is flying long haul to mid continental markets, like Indianapolis, with some of the great things that JetBlue for example does, which is flying leisure destinations and things like that," Raja explained.
Controlling expenses remains a life saving strategy for all the airlines. American reduced its daily average cash burn to $30 million last quarter. "We do believe several carriers can get to cash breakeven sometime in 2021, but most are at least a year away from sustainable profitability, although we wouldn't be surprised if some manage to produce a profit during one of the seasonally stronger quarters," Deutsche Bank told its clients.
Raja wouldn't predict when American will return to profitability and said, "We can't control when demand comes back. We can only make the airline as flexible and resilient as possible and that's what we've done."