Airline Stocks Are Still a Risky Bet of the Bottom

The v-shaped bounce in airline stocks in the second half of May rewarded investors who bet on the bottom. To sustain the rally, investors will need to start pricing in the daily loss decline as passenger traffic increases.

Realistically, airlines cannot operate at more than around 70% capacity on each flight. Maintaining plenty of distance among passengers, equipping staff, and customers with cotton masks and frequent sanitizing will decrease revenue potential and increase costs, respectively. Still, the near-term risks of betting on an airline stock rebound are moderate. The companies have the financial backing of the government and are cutting costs.

American Airlines (NASDAQ:AAL), United Airlines (NASDAQ:UAL), and Southwest Airlines (NYSE:LUV) traded at deceptively low price-to-earnings ratios. The P/E and forward P/E will rise sharply and at meaningless values as the company posts losses.

Predicting how true recovery plays out is nearly impossible. Investors may only monitor flight schedules, passenger load, and consumer sentiment. If media and the public start talking about "safe" vacationing involving flights, then this may signal a decrease in fear.

Airlines are a long way from the highs and will not get there for at least a year. They may retrace some of the declines this year. And bottom fishers are more than willing to bet on the rebound gaining momentum.