Shareholders in American Airlines and Southwest Airlines have reason to celebrate like the economy-crippling pandemic was all just a bad dream.
Forget half-empty planes and billions in accumulated debt and nevermind that every U.S. airline is still burning through millions of dollars a day in cash even with billions in government subsidies: Airline stocks are back near pre-pandemic levels.
And no one stands to profit more than the government itself, which took massive stock options in the airlines in exchange for billions in payroll support.
Despite a down day on Wall Street Tuesday after disappointing retail sales data, Southwest Airlines’ stock price is at the highest level in more than two years. It closed at $60.55 Tuesday, nearly 6% higher than where it started 2020.
American Airlines’ stock price, after sinking under $9 a share in May when many were questioning if air carriers could survive the COVID-19 crisis, closed at $24.47 Tuesday, even after sinking nearly 2.5%. The price is down slightly from what it was before the pandemic sent airline stocks to basement levels.
The same goes for Delta, Spirit and Alaska — stocks that are all above pre-pandemic price levels. Even airlines that have heavier debt loads, such as American and United, have seen stock prices rally in recent weeks.
“People are getting pretty excited for how fast traffic is coming back,” said Colin Scarola, an analyst with CFRA Research. “This seems like the leading edge as more people get vaccinated, especially if you think about how many people had to delay weddings and family events.”
By some measures, airlines haven’t been worth this much in years, Scarola said. That’s because airlines have issued billions of dollars worth of new stock since the pandemic as they tried to raise cash and weather the pandemic.
The nation’s four biggest airlines all said Monday that they have seen an uptick in new bookings in recent weeks as vaccine distribution grows, leading to hope that summer travel may start to look more like the record-breaking 2019 than the historically devastating 2020.
But even the most financially prudent airlines said they are still burning through cash. Gary Kelly, CEO of Dallas-based Southwest, said in a town hall last week that the carrier still needs to see a significant boost in traffic before profitability is within reach.
“We can’t be profitable with our flight activity at these levels,” Kelly said in a Washington Post video interview Monday. “We have too much overhead, we have too much invested in airplanes, in airports, in equipment and we have too many people.”
Fort Worth-based American said it lost about $30 million a day in the final three months of last year.
In fact, airlines only recently celebrated another $14 billion in government payroll support through the $1.9 trillion stimulus bill passed by Congress.
Bloomberg Intelligence analyst George Ferguson said investors are “baking in future expectations” for airlines from vaccine distributions and strong booking trends for summer.
“I think it’s just the market looking forward,” Ferguson said. “I do think there is some exuberance.”
But he also said there is reason to be hopeful. Preliminary airline schedules are showing about 80% as many seats for passengers this summer as there were in 2019, compared to just 30% in 2020.
“Now I will temper that by saying it will be a very competitive marketplace,” Ferguson said.
Despite giving $54 billion in grants and loans to airlines during the last year, it’s the federal government that could emerge as the biggest winner from the recent airline rally.
When the first round of stimulus was being negotiated in April 2020, Treasury officials required airlines to hand over “warrants” in exchange for grants and loans. Those warrants work just like stock options and were granted when airline stocks were at rock-bottom levels.
The government has nearly 24 million of these options available in American Airlines stock, granted when the stock was trading between $12.51 and $15.66 a share. At Tuesday’s $24.47 closing price, the federal government is up more than $266 million on its investment in American Airlines.
Southwest Airlines has netted the U.S. Treasury some $45 million so far. United and Delta, have profited the U.S. government $205 million and $185 million, respectively.
Timely stock options in the nation’s six biggest airlines could bring the U.S. government more than $800 million, according to regulatory filings and calculations based on Tuesday’s closing stock prices.
Scarola cautions that airlines may not be in a safe financial position yet. Business travelers have yet to return, lucrative international routes are still mostly closed and it could be years before the air travel industry is operating at normal conditions.
As in previous airline downturns, many of the biggest financial challenges didn’t come until years later when airlines struggled to repay growing debt loads.
“I don’t think we really know what the normalized environment is going to be,” he said. “With all the added debt, for airlines to get the profits they did in 2019 they’ll need significantly more revenue than they did in 2019.”
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