Following March’s first stimulus deal, both Republicans and Democrats continue to believe that the country needs a second stimulus package to help make ends meet and keep the economy running smoothly through the end of the year. However, there has not been enough agreement for a second stimulus package. The discussion on this issue has been dramatic with negotiations reaching a tipping point before the November 3rd Presidential election. A new stimulus package is expected to include $2.4 trillion in relief.
Whether or not a bill gets passed before the election or after, the chances of a final bill are strong. That would most likely include aid for the struggling airline industry. As a second wave seems to be hitting the U.S. and other parts of the world, that aid is essential to keeping the industry afloat until the pandemic ends.
When a bill is passed, it would almost surely result in higher prices for battered airline stocks such as Southwest Airlines Company (LUV), Virgin Galactic Holdings Inc. (SPCE), and JetBlue Airways Corporation (JBLU).
Southwest Airlines Company (LUV)
LUV is one of the leading air carriers in the United States that operates a passenger airline, providing scheduled air transportation services in the international markets. According to Statista research, LUV has a 16.8% domestic market share in the US airline industry. LUV operated more than 4,000 weekday departures among a network of 101 destinations in the United States and 10 additional countries. With a customer base topping 130 million passengers, the company had over 737 aircraft in its fleet at the end of June 2020.
LUV has recently announced nine new leisure routes to cities across the country with a focus on Florida, Colorado, and California. Rising business demand has created an opportunity for LUV to similarly expand its footprint in Chicago and Houston to give more travelers access to its hospitality, low fares, and customer-friendly policies.
Net cash provided by operations during the quarter was $897 million, driven primarily by the Payroll Support Program (PSP) proceeds, improved significantly from the quarter-ago $377 million cash used. Moreover, the company returned five leased 737-700 aircraft during the quarter and expects to take delivery of nearly 48 MAX aircraft through December 31, 2021.
LUV has the best liquidity in the business which is consistently improving. The company originally estimated its daily cash burn would be $30 million to $35 million in the second quarter. It ended up burning an average of $23 million per day in the quarter and just $16 million per day in June. The company will report its third quarter results later this month.
The stock has lost nearly 26% year-to-date to close yesterday’s trading session at $39.68. However, the stock has gained more than 18% in the past three months in hopes of the stimulus.
Virgin Galactic Holdings Inc. (SPCE)
SPCE is a vertically integrated aerospace company that develops human spaceflight for private individuals and researchers in the United States. The company's spaceship operations include commercial human spaceflight, flying commercial research, and development payloads into space. SPEC went public in October 2019 through a special purpose acquisition company called Social Capital Hedosophia. SPCE is the world’s first and only publicly traded commercial human spaceflight company.
SPCE engineers plan to complete testing of the company's SpaceShipTwo system on October 22. If successful, this test would mark a major transition for the space-liner vehicle the company is basing its operations on. Moreover, by offering high-speed point-to-point travel, SPCE wants to commercialize space travel and revolutionize commercial flight.
The company generated zero revenue in its second quarter that ended June and reported a gigantic loss of $62 million. However, cash position remains strong, with cash and cash equivalents of $360 million as of June 30, 2020. Moreover, SPCE cleared three new Federal Aviation Administration (FAA) Verification and Validation elements, bringing the total number of elements cleared to date to 27 out of 29. The company continued to demonstrate strong pre-sales demand in the ‘One Small Step’ initiative, with over 700 participants and deposit payments received.
SPCE hasn't flown any paying passengers yet. However, after successful glide flights, SPCE is preparing for powered tests and sees its first commercial flights in the first quarter of 2021. Wall Street analysts are focused on its potential as the stock has seen recent gains after Bank of America (BAC) issued a high price target on the company last month.
SPCE closed yesterday’s trading session at $22.44, gaining 94.3% year-to-date. The stock is up more than 30% in the past month on stimulus hopes for its commercial flight segment and successful product trails.
JetBlue Airways Corporation (JBLU)
JBLU is a passenger carrier company that provides air transportation services. It serves 99 destinations in 30 US states and over 21 countries in the Caribbean and Latin America. JBLU has a market share of 5.4% in the US airline industry and is the first American airline to achieve carbon neutrality by investing heavily in sustainable aviation fuel.
JBLU has recently added 24 new routes in markets, including Florida, that will strengthen demand potential ahead of the holiday season. JBLU was one of the seven airline companies that have received loans from the US Treasury last month. Moreover, the company recently announced entering into a partnership with Vault Health to make at-home COVID-19 tests widely available for customers with pending travel plans.
JBLU executed $120 million under sale-leaseback transactions, and entered a binding agreement for three additional sale-leaseback transactions for upcoming deliveries. Additionally, JBLU entered into two other binding sale-leaseback agreements for aircraft already existing in its fleet.
The stock has lost 34.6% year-to-date to close yesterday’s trading session at $12.24. However, the stock has gained nearly 16% in the past three months in hopes of the stimulus and has recently been upgraded by Morgan Stanley (MS) and Goldman Sachs (GS).
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LUV shares were trading at $39.65 per share on Monday afternoon, down $0.03 (-0.08%). Year-to-date, LUV has declined -26.26%, versus a 7.70% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.
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