In the near-term, we are selective within airlines and cautious into Q3 earnings. Given still steep (70%+) nominal demand declines, capacity reductions that appear insufficient within that context, delays to some planned furloughs, and motivation to sound negative in appeal for further gov’t financial support, we don’t expect much improvement in airlines’ messaging on Q3 earnings conference calls relative to what they said back in July.  We prefer ALGT given its leverage to domestic leisure travel, which is holding up better than business or international, along with its focus on less-than-daily flying in non-competitive markets and red states, along with de minimus capex commitments.

Looking beyond 2020, it’s tough to call the outlook for airline stocks in absolute terms, which is almost entirely dependent on the duration of the downturn in travel demand and the shape of the recovery. We expect airlines to eventually rally when a vaccine is approved, but even then demand may be slow to recover. Travel demand could eventually recover faster than supply given the constraints that levered balance sheets will place on capex and a likely “once bitten, twice shy” mentality from management, as we have seen in the first few years of prior recoveries. At that point, we’d favor UAL, where we see equity upside into the $60’s.

Top Picks:

  • Allegiant Travel (ALGT)

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