Could Airline Stocks Breakout?

One of the areas most affected by the coronavirus is airline stocks. The sector is dependent on travel which has significantly eroded due to the virus.

However, there has been a slow but steady improvement in the number of people traveling. We can see this with the TSA travel data which shows the number of people in transit. On October 14, 2020, about 717,000 people traveled. This is about 33% of how many people traveled at the same time last year. But, it continues a steady streak of gains that started from the lows of March and April.

This improvement has come through the second wave in May and June, and there's little loss of momentum despite what seems like a third resurgence of the virus that many health officials think could be the worst due to the cold weather.

Airline Stocks

Airlines have huge fixed costs as their planes are bought on credit, they have a large number of employees, and need to be maintained which is also expensive. Airplanes routinely go bankrupt even during less challenging circumstances, so it's amazing that they have stayed so resilient. During a normal recession, travel volume might drop by 10 to 20%.

The airline stocks have been helped by the federal government's injection of funds and payroll protection program. However, it seems like the airlines need another bailout or more job losses will be imminent. Given that the economy is already weak and interest rates are low, it's still expected that policymakers will act and provide assistance.

From the March lows, the S&P 500 (NYSE: SPY) is 58% higher, and it has a 7% gain year-to-date. In contrast, the U.S. Global Jets ETF (NYSE: JETS) is 41% above its lows. It's also 45% down year-to-date.

Until mid-August, there was increasing hope that airlines would be able to breakout higher especially as many oversold stocks and sectors have posted impressive rebounds. However, it's primarily traded sideways. For the last 4 months, JETS has traded in a tight range between $16 and $18.

Although there could be an increase in travel over the coming months, there's unlikely to be at a meaningful enough recovery that would make air travel profitable, again. Due to cost-cuts and reducing capacity, it's estimated that traveling rates returning to 80% of pre-coronavirus levels would result in the airlines being more profitable.

The timeline for this outcome will be pushed back if the winter is as bad as some believe it will be. So, investors should steer clear from the sector unless they are confident that the coronavirus threat this winter will be less bad than expected.