Airlines are raising capital again, pressuring some of the stocks. But analysts continue to see value in the domestic budget carriers, arguing that they will benefit from a rebound in leisure travel.
American Airlines Group (ticker: AAL) said in a filing on Monday that it was raising $3.5 billion through a mix of senior secured debt, common stock, convertible notes, and a new term loan facility. United Airlines Holdings (UAL), meanwhile, is gearing up to issue $5 billion in debt this week, according to Bloomberg, using its frequent-flier mileage program as collateral.
Shares of American were off 6% in Monday morning trading, while United’s stock was down 3%.
Airline balance sheets are getting stressed with more debt, and equity values are being diluted as carriers issue more stock. Some analysts continue to favor the low-cost carriers, arguing their focus on the domestic leisure market gives them an edge in a recovery.
Raymond James analyst Savanthi Syth upgraded shares of Allegiant Travel (ALGT) to a Strong Buy rating on Monday and raised her price target to $135 from $115. The upgrade reflects “our view of both a faster earnings recovery (due to the leisure and geographical exposure) and lower risk relative to U.S. peers heading into the fall,” she writes.
Shares of Allegiant were up 0.9% in trading Monday, to $109.
Syth continues to prefer airlines with a larger share of the domestic/leisure travel. Along with Allegiant, she has Strong Buy ratings on Alaska Air Group (ALK) and Southwest Airlines (LUV). She also has a Strong Buy on Delta Air Lines (DAL) and expects SkyWest (SKYW), a carrier that contracts with Alaska, American, Delta, and United, to be a “structural winner” in the regional market.
American, however, looks like dicier. The airline is adding back more capacity than its peers, gambling on demand rebounding sharply. That could pay off if travel recovers through the summer and into the fall, enabling American to capture more share than United and Delta. If demand doesn’t materialize, because of a second virus wave, however, it will pressure American’s already shaky liquidity position.
Airline traffic has been building for weeks with the summer travel season now in full swing. Domestic fares are picking up, averaging $324 for the week ending June 15, up from $308 in early May, according to Cowen’s fare tracker of American, Delta, and United. But passenger demand is still down 83% compared with last year’s levels, resulting in erratic data trends, Cowen says. American seems to be charging the least, at an average fare of $290, while Delta is up to $376 and United is at $323.
Leisure travel typically declines in the fall, when business travel pick up the slack. But this recovery isn’t following a standard economic playbook. Companies are just starting to bring workers back to offices, and it is unclear if they’ll want to send employees on the road this fall.
American’s gambit to build a robust flight schedule may work if the recovery gains steam. If not, expect the stock to come under more pressure.
Write to Daren Fonda at daren.fonda@barrons.com
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