The coronavirus pandemic has caused the largest sell-off in airline stocks since 9/11. Shares of airline trading on the public market have plunged as travelers avoid the skies.
Health authorities have encouraged citizens around the globe to halt all nonessential travel. This trend has decimated the balance sheet of airline companies and fueled a wave of cancelations and uncertainty ahead.
The state of the U.S. airline industry is so dire that Airlines for America, a trade group, has sought a $50 billion bailout package from the government.
This has fueled outrage and shock, given the airlines' history of failing to build "rainy day funds" in the event of a crisis. Rather than save cash, airline companies have notoriously used the money on hand to buy back stock and artificially inflate their share prices. That has fueled opposition to taxpayer support.
That said, the recent downturn in the sector has many people wondering, "Should I buy airline stocks right now?"
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The answer depends heavily on your willingness to take risks with your money with broader, structural problems impacting the economy.
That said, there are two airline stocks to consider in the months ahead.
Looking Ahead for the Airline Industry
Even if social distancing succeeds in flattening the curve, a collapse in air travel appears to be inevitable for some time.
The so-called "all clear" from the government could open up the skies at any point. However, there remains the risk that the psychology of the airline consumer may be bruised for an extended period.
The idea of packing oneself into a flying metal tube among strangers in the wake of a pandemic might cause some to hyperventilate.
Airlines have aggressively slashed flights, with some sending large airplanes into storage for the foreseeable future. Last week, American Airlines Group Inc. (NASDAQ: AAL) cut its domestic flight schedule by 30% in April. It cut international flights by 75% in April.
The numbers in May look similar. Even in the face of a dramatic downturn in infections, American Airlines could see a significant decline in flights for the rest of the year. The demand side of this equation for airlines is incredibly difficult to measure without a clear indication of forward-looking sentiment from the consumer.
For that reason, it's very difficult to recommend buying airline stocks without outlining the apparent threats to the industry in a post-COVID-19 world.
The risk will be high, but the reward could be higher if conditions improve and companies see a boost to their cash flow in the coming months thanks to a semi-solid return to normal.
That being said, these are the only two airline stocks to consider buying and holding right now.
Again, this is only for investors with high risk tolerance...
Two Airline Stocks to Consider for the Long Haul
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For investors who are patient enough to wait for a full-scale recovery, two names stand out in today's environment for different reasons.
First, Delta Air Lines Inc. (NYSE: DAL) is intriguing due to its stable cash flow and strong domestic presence. Investors can anticipate that domestic airlines might recover faster than those with a large reliance on international travel. This would give firms like Southwest Airlines Co. (NYSE: LUV) and Alaska Air Group Inc. (NYSE: ALK) an advantage over Delta.
However, investors should take a longer-term approach when it comes to this recovery. And given that position, it is important to consider just who else is likely buying the stock.
When the first quarter 13Ds appear, this is one company to keep an eye on. Buffett and Berkshire Hathaway Inc. (NYSE: BRK.A) could put some money to work and buy up a bigger stake in Delta. There has even been speculation that Berkshire may consider a full-scale takeover of Delta. Berkshire Vice Chair Charlie Munger suggested last year that airlines have many similar qualities to the railroads that earned them a fortune in recent decades. Also, Delta is a strategic marketing partner of another large position of Berkshire's portfolio: American Express (NYSE: AXP).
Meanwhile, for investors looking to speculate on a significant bounce back, a compelling thesis exists for Jet Blue Airways (NASDAQ: JBLU). The embattled airline giant has begged the government for a bailout. And it just might get it this week.
According to MacroAxios, JetBlue currently has a 48% probability of falling into bankruptcy.
But the risk-reward on the company is compelling, given its thesis for liquidation. The company is trading at just 0.40% of its tangible book value. Naturally, a figure that low might suggest a dire situation for a firm. However, if we take a sum-of-its-parts estimate, we find that the stock might be able to generate value for investors in a sale.
If we assume that JetBlue can sell its planes at 25% of book value with no value on its operating leases for terminals and gates, shares would effectively be worth $10.34.
That price would represent a 53% gain from today's current value. Again, this is very speculative. While a bailout may be coming for the airline industry, remember it is still very early in this financial downturn.
You should only speculate with money that you can afford to lose or let sit idly in this stock as it attempts to recover.
If you haven't already, make sure you check out our complete roadmap of what the coronavirus crisis means for your money and what you can do about it. It's completely free for our readers...