Airlines shares are near pre-pandemic levels, despite excess cash flow and debt build-up

Shareholders of American Airlines and Southwest Airlines have reason to rejoice as if the pandemic crippling the economy was just a bad dream.

Forget about half-empty planes and billions in accumulated debt, and it doesn’t matter that every American airline still burns millions of dollars a day in cash, even with billions in government grants.

Airline stock prices are back near – or above – pre-pandemic levels.

And no one can profit from it more than the US government, which has taken massive airline stock options in exchange for billions of dollars in payroll support.

After another good day for the airlines on Wall Street on Wednesday, Southwest Airlines stock is at its highest for more than two years. It closed at $ 61.77 on Wednesday, almost 13% higher than at the start of 2020.

American Airlines’ share price, after dropping below $ 9 a share in May as many wondered if airlines could survive the COVID-19 crisis, closed at $ 25.16 Wednesday after gaining 2.5% in the day’s trading. The price has only dropped slightly from what it was before the pandemic sent airline stocks to the basement level.

The same is true for Delta, Spirit and Alaska – carriers with stocks all above pre-pandemic price points. Even airlines that have heavier debt, like American and United, have seen their stock prices rise in recent weeks.

“People are pretty excited about how quickly the traffic is coming back,” said Colin Scarola, analyst at CFRA Research. “It seems to be the vanguard as more and more people get vaccinated, especially if you think about the number of people who have had to delay weddings and family events.”

In some ways, airlines haven’t been worth that much for years, said Scarola. In part, that’s because airlines issued billions of dollars in new stocks as they tried to raise funds and weather the pandemic.

The country’s four largest airlines have all seen a surge in bookings in recent weeks as vaccinations increase, giving rise to hopes that summer travel may start to look more like a 2019 record than the historically devastating 2020.

But even the most financially conservative airlines have said they are still burning money. Gary Kelly, CEO of Dallas-based Southwest, told a town hall last week that the carrier still needed a significant increase in traffic before profitability was within reach.

“We cannot be profitable with our flight business at these levels,” Kelly reiterated in a Washington post video interview Monday. “We have too much overhead, we have invested too much in planes, airports, equipment and we have too many people.”

Fort Worth-based American said it lost about $ 30 million a day over the past three months of last year.

In fact, airlines only recently celebrated an additional $ 14 billion in government payroll support thanks to the $ 1.9 billion stimulus bill passed by Congress.

So what is it that drives airline stocks up?

Investors are “preparing future expectations” of airlines with vaccine distributions and strong booking trends for the summer, said George Ferguson, analyst at Bloomberg Intelligence.

“I think it’s just the market looking to the future,” he said. “I think there is a certain exuberance.”

But he also said there was cause for hope. Preliminary airline timetables show around 80% more seats for passengers this summer than in 2019, compared to just 30% in 2020.

“Now I’m going to temper that by saying it’s going to be a very competitive market,” Ferguson said.

Despite providing $ 54 billion in grants and loans to airlines over the past year, the federal government could become the biggest winner in the airline rally.

When the first round of stimulus packages was negotiated in April 2020, Treasury officials demanded airlines hand over “warrants” in exchange for grants and loans. These warrants function exactly like stock options and were granted when airline shares were at their lowest.

The government has nearly 24 million of these options available on American Airlines shares, granted when the shares were trading between $ 12.51 and $ 15.66 per share. At Wednesday’s closing price of $ 25.16, the federal government increased its investment in American Airlines by more than $ 283 million.

Southwest Airlines has brought the US Treasury some $ 48 million so far. And the government raised $ 226 million on United and $ 191 million on Delta.

Timely stock options at the nation’s six largest airlines could earn the U.S. government more than $ 854 million, according to regulatory documents and calculations based on Wednesday’s closing prices.

Scarola warned that airlines may not yet be in a secure financial position. Business travelers have yet to return, lucrative international routes are still mostly closed, and it could be years before the airline industry operates at normal levels.

In previous airline downturns, many of the biggest financial challenges came years later, when airlines struggled to pay off growing debts.

“I don’t think we really know what the normalized environment will be,” said Scarola. “With all the extra debt, for the airlines to realize the profits they made in 2019, they will need a lot more revenue than in 2019.”

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