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Airline Stocks Show an Upturn in Thursday's Trading: A Report

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That stocks in the Airline industry have been one of the worst hit by the coronavirus pandemic is no longer news. Dwindling passenger revenues due to lackluster air-travel demand are the main challenge confronting the aviation stocks. In fact, airline companies incurred huge losses in each of the first three quarters of 2020 due to plummeting passenger revenues, which account for bulk of their top lines.

This bearish trend continued for Delta Air Lines (DAL - Free Report) , which kicked off the fourth-quarter 2020 earnings season yesterday for the airline industry. This Atlanta-GA based company, currently carrying a Zacks Rank #3 (Hold), suffered a loss (excluding $1.34 from non-recurring items) of $2.53 per share in the December quarter, wider than the Zacks Consensus Estimate of a loss of $2.43.

However, Delta reported earnings of $1.70 per share (on an adjusted basis) in the year-ago period, driven by high passenger revenues as air-travel demand was upbeat at that time. With a spurt in coronavirus cases again in the United States, passenger revenues were persistently weak in the December quarter, witnessing a 74% plunge year over year to $2,698 million. 

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Despite this airline heavyweight posting a wider-than-expected loss, its shares appreciated 2.5% on Jan 14 to close the trading session at $41.47. 

What Drove the Delta Stock?

Despite the plunge in passenger revenues, Delta’s overall top-line performance was better than expected with cargo revenues increasing 10% and revenues from other sources climbing 6%. Notably, Delta’s fourth-quarter total revenues of $3,973 million topped the Zacks Consensus Estimate of $3,754.5 million.

The second positive factor of the carrier’s earnings report in this coronavirus-ravaged scenario apart from its revenue beat is that the daily cash burn halved to $12 million (on average) in the final quarter of 2020 from $24 million, sequentially. Average daily cash burn is expected in the $10-$15 million range in the March quarter of 2021.

Per Gary Chase, Delta’s interim co-chief financial officer, the carrier achieved success in reducing its “average daily cash burn by nearly 90% since the early days of the pandemic in March”. Notably, Delta’s CEO Ed Bastian believes that the company will generate positive cash flow by this spring.

Riding on the above tailwinds, not only Delta’s stock benefited but most other stocks in the industry too moved northward. Evidently, shares of United Airlines (UAL - Free Report) , American Airlines (AAL - Free Report) , Southwest Airlines (LUV - Free Report) and Spirit Airlines (SAVE - Free Report) gained 4.2%, 5.9%, 1.7% and 8.2%, respectively, on Jan 14. This uptick in the airline companies’ share price further led the NYSE ARCA Airline Index to inch up 4.8% in Thursday’s trading.

Apart from Delta’s bullish cash-burn performance news, management at Alaska Air Group (ALK - Free Report) , shares of which gained 6.9% on Jan 14, too confirmed on the same day that the company’s December-quarter cash burn improved to roughly $350 million from $399 million in the September quarter. Notably, factors like the increase in passengers carried and a recovery in demand for future travel, which hit highs in October despite the continued coronavirus woes, contributed to this upside.

2021 Unlikely as Bleak as 2020 for Airlines

Investors interested in the airline space would be hoping that the upbeat stock price movement witnessed yesterday is not a one-off phenomenon and carries on throughout the year. They would also be expecting airlines to perform better in 2021 than the year gone by.

The greatest source of optimism this year is likely to be the availability of vaccines to combat the coronavirus. While the immunization programs already started in some countries, we expect more vaccines to be available in the market as the year progresses. The above development should prop up the airline companies, which are pinning hopes on the people’s return to air travel after getting the vaccine jabs. This, in turn, should drive passenger revenues.

The second coronavirus relief package in the United States, which grants a $15-billion stimulus to the airlines is another sop to protect jobs of U.S. airline personnel at least for the short term.

The International Air Transport Association’s (IATA) forecast for 2021 also hints at the supposed improvement in the airlines’ plight during the current year. IATA predicts the aviation industry’s global loss to narrow to $38.7 billion in 2021 from $118.5 billion anticipated in 2020.

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