Now that we’re beginning – just beginning – to emerge from the anti-coronavirus shutdowns, and the economy is starting to open up, one obvious question is begging for an answer. The restart, of society of the economy, will depend on the success we encounter in lifting trade and travel restriction. How soon will that happen, and will it happen soon enough?
For the airline industry, at least one answer may be obvious: the restart cannot come soon enough. Airlines have famously thin margins, and with long-distance and international travel simply stopped and air traffic down by 90%, they have been hemorrhaging cash. While the larger airlines may have the resources to survive, there is no doubt that at least some smaller airlines will go under.
Writing from Credit Suisse, airline industry analyst Jose Caiado sees some hope. Low share prices now make an attractive point of entry, and Caiado notes that, as society reopens, air travel will inevitably resume its essential function. There is simply no other efficient way to handle rapid long-distance travel. The key for investors will be finding those airlines best positioned to both to weather the downturn and quickly resume operations.
“We believe industry has adequate liquidity to bridge through to an eventual demand recovery, which we expect towards the end of 2020. However, balance sheets are now heavily burdened with incremental leverage, and debt reduction will become industry’s primary strategic objective as it emerges from the crisis,” Caiado noted.
On a practical note, for investors, Caiado points out three airlines that are solid bets to survive the corona crisis and make gains in the restart. Using TipRanks’ Stock Comparison tool, we lined up the three alongside each other to get the lowdown on what the near-term holds for these airline players.
Delta Airlines (DAL)
Delta certainly meets the size test to survive the coronavirus. By fleet size, scheduled passenger numbers, and revenue per passenger-miles flown – all key industry metrics – Delta is the world’s second largest airline. The company boasts a market cap of $12.24 billion, and brought in $47 billion in revenue in 2019. With nine US hubs, and status as a founding member of the international SkyTeam alliance, Delta holds a secure position in the industry.
The impact of COVID-19 is clear from DAL’s earnings. The company reported $1.70 per share in Q4, beating estimates by 21%, but that switched to a 51-cent per share loss in Q1. On a bright note, the Q1 loss was less deep than had been forecast, coming in 29% above expectations. Stock performance has not matched earnings, as DAL shares are still down 67% from February levels.
In March, Delta made two moves to improve the company’s liquidity situation, which Jose Caiado noted as priority for airlines generally. On March 12, the company paid out a regular quarterly dividend of 40.25 cents per share – and on March 20, the company announced that it was drawing $3 billion from its existing revolving credit facility and at the same time a new credit agreement for $2.6 billion. Accompanying these credit moves, DAL also suspended its capital return policy, halting stock buybacks and dividend payments going forward.
Delta’s income structure pre-positions the airline to recover once air travel begins to pick up. Caiado notes, “We believe Delta is among the best-positioned airlines to quickly pay down the incremental debt it raised this year and quickly restore its financial strength, including its investment grade ratings… we do expect to see a demand recovery in the domestic market before international, and while DAL is a global carrier with international exposure, it has outsized domestic revenue exposure (72%) relative to its network peers, which is also where it earns its highest margins.”
Caiado describes DAL as a Top Pick, rating the stock a Buy with a price target of $42. This target implies a robust upside of 96% in the coming 12 months. (To watch Caiado’s track record, click here)
Overall, Wall Street agrees that DAL is a buying proposition. The stock’s Moderate Buy analyst consensus rating is based on 9 Buys and 5 Holds set in the past two months. Share price has fallen to an affordable $21.41, while the $37.91 average price target suggests it has room for 77% upside growth. (See Delta stock analysis on TipRanks)
United Airlines Holdings (UAL)
And now we move on to the largest of the airlines, United. This holding company controls subsidiary companies around the world, and founded the Star Alliance, a cooperative grouping of airlines. With $43.26 billion in 2019 revenues, and the highest revenue per passenger-mile in the industry, UAL is a giant by any standard.
Like Delta, United felt a serious hurt moving from Q4 to Q1, due to the effects of the COVID-19 pandemic. Q4 had seen EPS of $2.67, just over the forecast, while Q1 saw UAL report a $2.57 per share net loss. As was the case with Delta, United’s Q1 loss was not as deep as expected. Looking toward Q2, however, UAL is expected to post a loss of $9.83 per share. Being the world’s largest airline brings advantages – but it also brings disadvantages. UAL was at the top, and so had farther to fall.
Earlier this month, United Airlines, the chief subsidiary of UAL, announced its intention to make a private offering of $2.25 billion senior secured notes. This capital expansion move is intended to pay off the $2 billion in outstanding principal on a term loan entered into this past March as a move to weather the coronavirus storm. The remaining funds raised by the senior secured notes will be used for general corporate purposes. UAL will guarantee this note issue.
Analyst Caiado has noted two important points about UAL, both in line with his general views of the airline industry. First, he points out that “United has proactively led the way with respect to many Covid-19 response actions, including being the first airline to implement steep capacity cuts and suspend share repurchases, and the first to raise additional liquidity, including equity capital.”
Second, and more importantly, Caiado shows that UAL is the airline best-positioned to modernize its fleet in the wake of the coronavirus epidemic. He writes, “Assuming the 737 MAX is ungrounded later this year, UAL will take delivery of 16 aircraft this year (already built), and it will take delivery of an additional 24 MAXs in 2021. UAL also expects to take delivery of eight more 787-9 aircraft this year as well as eight 787-10 aircraft next year.”
These new aircraft will not represent a burden on the company’s liquidity position: “UAL will not take any new aircraft that is not already fully financed and therefore these deliveries are not a drain on cash.” Looking further ahead, UAL is in talks with Boeing regarding another 131 MAX aircraft currently on order but not yet under construction.
Caiado puts a $41 price target on UAL shares, to back up his Buy rating. His price target implies a one-year upside of 74%. (To watch Caiado’s track record, click here)
Wall Street is more bullish here than Caiado is, as the average price target on UAL is $48.92, representing a hefty 108% upside potential. The Moderate Buy consensus rating is based on 12 reviews, including 6 Buys and 7 Holds. (See United stock analysis on TipRanks)
Alaska Air Group (ALK)
Last on our list for today is Alaska Air. With a market cap of $3.14 billion and $8.8 billion in revenue last year, this company occupies a ‘second tier’ in size within the industry. It’s not one of the dominating giants, but it is a major regional player, with a solid reputation for quality service in Alaska and along the West Coast of North America.
Like most of its industry peers, ALK saw earnings turn sour in 2020. The $1.46 reported in Q4 2019 was 3.5% above forecasts, reflecting the generally positive trends in the industry – but Q1 came in with a net loss of 82 cents per share. As with the giants above, this loss was not as deep as expected; it beat the forecast by 35%. Federal bailout actions under the CARES Act and company efforts to cut cost and improve access to credit both worked to ameliorate the COVID-19 impact.
While Alaska Air was forced to furlough employees, the company also took measures at the upper end of the pyramid to cut costs. The company has suspended its dividend (which had been a generous 5.85%), and has drawn on $825 million worth of credit. Top management has taken deep pay cuts across the board, ranging from 20% to 100%. While cosmetic, these pay cuts are an important PR step.
Jose Caiado, in his ALK review for Credit Suisse, sees Alaska Air’s flexible position as its greatest advantage writing, “…ALK will be able to pay down a substantial amount of the debt it has borrowed to manage through the current crisis and leverage metrics can return to pre-crisis levels. We appreciate ALK’s great flexibility with respect to its fleet & aircraft order book. ALK has several dozen Airbus aircraft slated for lease returns, and leverage with Boeing with respect to the 737 MAX given the contractual delay.”
Overall, Caiado gives ALK a Buy rating, and his $51 price target indicates a high upside potential of 82%. (To watch Caiado’s track record, click here)
The analyst consensus rating on Alaska Air is another Moderate Buy, this one based on 7 Buy ratings and 5 Holds. The stock is selling for $27.94 right now, and the average price target, at $42.42, suggests a bullish 52% upside potential for the year ahead. (See Alaska Air’s stock analysis on TipRanks)
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