What’s propelling American, Delta and United’s share prices?

The US airline sector has faced severe turbulence so far this year. American Airlines [AAL], Delta Air Lines [DAL] and United Airlines’ [UAL] have been grounded.

After starting the year at $28.98, American Airlines’ share price has more than halved in value in 2020 and now trades at $13.19 as of 18 September. Meanwhile, Delta’s share price has dropped just short of 40% to $32.84 in the same period. United Airlines’ share price also has suffered, falling 58% for the year to $36.97 on 18 September.

All three stocks suffered during the coronavirus-induced market plunge. American Airlines’ share price crashed to a low of $9.39 on 3 April, Delta’s share price slumped to $21.35 on 20 March and United Airlines’ share price slipped to $21.28 on 19 March.

The closing of air corridors during the coronavirus crisis has left US airlines struggling and with the long-term investment case for the overall sector in tatters, should investors be looking to its recovery?

From nosediving to soaring

Other sectors such as technology may have benefited from the social and economic shifts brought about by lockdowns, but airline sector share prices — like their planes — were grounded.

Airlines were hit by not only the loss of passenger income — as capacity and schedules were slashed — but also by the high cost of keeping a large number of aircrafts in their hangars.

But, as virus numbers fell and air corridors gradually opened again in June, the sector did experience a short-lived recovery. Shares in American Airlines’ share price rose 24%, United Airlines’ share price rose 23% and Delta’s share price rose 11% during the month.

Investors were also cheered by measures taken to shore up finances, among some of the carriers. Delta announced a $9bn capital package after selling a record amount of debt. The sector as a whole also received $25bn in US government stimulus.

Wider than expected second quarter losses

Poor second-quarter results reversed took the rally off course, however. United Airlines’ share price fell 9.3% in July. The news was worse for Delta’s share price, which dropped 10%, and for American Airlines’ share price, which slumped 14% throughout the month.

Delta posted a quarterly loss of $7bn — its biggest loss since 2008 — alongside a daily cash burn rate of $27m. Meanwhile, America Airlines and United posted losses of $2.1bn and $1.6bn, respectively, alongside daily cash burn rates of $30m and $25m.

The airlines did see some respite in August, however, as travel demand in US airports continued to improve for the fourth successive month. American Airlines, Delta and United Airlines’’ share prices rose 17%, 23% and 14% in August.

But sentiment has changed once more in September. Despite the increased travel demand, virus fears linger amid talk of new lockdowns.

The International Air Transport Association forecasts that it will take at least three years for international airline travel to recover to pre-COVID-19 levels, meaning reduced capacity and more idle planes on the horizon.

How to play airline stocks

However, Delta’s share prices prospects look good the stock’s prospects look good. The consensus among analysts polled by MarketScreener is that the stock will outperform. The stock was given an average target price of $38.19.

Ravi Shanker, a Morgan Stanley analyst, has a buy rating on the stock with a $50 price target, according to TipRanks.

“Delta has some of the strongest customer satisfaction numbers. We see limited liquidity risk here,” Shanker said. “We see its international alliances and partnerships as strategic assets.”

Seaport Global Securities has a buy rating on Delta based on its leading position in major markets.

“We believe the value is there for those that can look out a year and stomach near-term volatility tied to COVID-19 uncertainty. Consensus is under-appreciating Delta’s ability to recover,” the agency stated, according to Seeking Alpha.

United Airlines also has an outperform rating on MarketScreenerwith an average price target of $41.26.

Meanwhile, analysts rate American Airlines a hold with a price target of $11.72.

The disparity could due to American Airlines’ net debt of $30.81bn, which falls foul of Shanker’s liquidity rule.

“Airliners with high domestic leisure exposure, medium-haul lengths, strong customer loyalty and attractive fares will see demand come back first,” Shanker said. “We believe the worst of imminent liquidity risk is past us, but we still prefer companies with the most balance sheet firepower.”