Airlines gave up much of their rebound from May lows when many States reported a sharp increase in coronavirus infections. So, even though the sector added more cash to the balance sheet, it also took on more debt.
Airline stocks cannot take off until passenger traffic volumes accelerate. That trend is at risk.
American (NASDAQ:AAL) sold bonds at high interest rates to add more cash on hand. Conversely, Southwest (NYSE:LUV) and Delta (NYSE:DAL) both set or forecast breakeven operations by next year.
But American’s high interest rate costs and increasing debt levels put the company in the fragile territory. Rising virus infection rates may force health officials to limit flight capacity and daily flights. The government has the mandate to minimize the spread of the virus among the different States. So, the slowing revenue for airlines will only exasperate their cash flow problems.
Delta’s plans on laying off more pilots will help it cut its costs and return to profitability sooner than the other airlines. If a price war ensues, Delta has the financial strength to compete. As other airlines fail, investors should carefully choose the winners from the losers.
For now, most airline stocks will trend lower as investors reassess the coronavirus disruption on the industry. This could take several weeks, at the very least.
