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Airline stocks rally, as slew of revenue warnings come with signs of recovery

Tomi Kilgore, and Claudia Assis

The weakness in August and early September was widely expected, with some airlines saying it will be temporary

Several U.S. airlines on Thursday warned investors that their third-quarter revenue would be weaker than previously forecast as the recent spike in COVID-19 cases has cut down on people's travel plans.

The shares of air carriers that issued revenue warnings took an initial hit, but reversed to trade sharply higher after the opening bell, as some airlines even suggested that the worst has already passed and the fizzling out in travel was expected.

The airlines said that after a strong July, the pace of recovery in bookings slowed and cancellations increased in August, with that weakness continuing into September as COVID-19 cases rose and with a small impact from Hurricane Ida.

On average, the airlines cut third-quarter capacity expectations by 2% (12% as compared with 2019), and cut revenue expectations by 4%, or 24% as compared with 2019, Jefferies analyst Sheila Kahyaoglu said in a note Thursday.

The revenue warnings come after the number of new daily COVID-19 cases started climbing in July and reached levels in August and the start of September that hadn't been seen in six months, before dipping slightly in the past week. Read MarketWatch's "Coronavirus Update" column.

And on cue, the daily average of people going through Transportation Security Administration checkpoints was 2.04 million in July, the highest monthly average for the year, then fell to 1.85 million in August, according to a MarketWatch analysis of TSA data. So far in September, the daily average has declined to 1.72 million.

With that data already widely available, the U.S. Global Jets exchange-traded fund (JETS) had been selling off since peaking in mid-March. It tumbled 9.9% in June and fell another 5.3% in July, then edged up 0.4% in August and has gained 0.9% month-to-date. It has now shed 12.6% over the past three months, while the S&P 500 index has gained 7.3%.

On Thursday, despite all the warnings, the Jets ETF shot up 2.9%.

Shares of Delta Air Lines Inc. (DAL) were down as much as 1.1% ahead of the open, but reversed course to surge 4.3% in morning trading, as the company suggested the weakness may already be over.

The air carrier said only that it expected third-quarter revenue to be at the "lower end" of its previous guidance range, but said its outlook for total capacity was "unchanged."

"While the environment remains choppy, booking trends have stabilized in the last 10 days and the recovery is expected to resume as case counts decline," Delta said in a statement.

Delta's third-quarter guidance "looks mixed," analyst Stephen Trent with Citi said in a note Thursday.

"On the negative side, management is seeing a little more cost creep versus what had been previously anticipated, while revenue should now come in at the lower end of the previous guide," he said. "On a slightly more positive note, the Atlanta-based giant should now also see some tailwind from lower jet fuel expenses." Trent kept his buy rating on Delta shares.

Based on data from a New York Times tracker, the 7-day average of new COVID-19 cases was 148,538 on Wednesday, down from 166,015 a week ago, and 3% below where it was two weeks ago.

American Airlines Group Inc.'s stock (AAL) sank as much as 1.5% premarket, but charged 5.6% higher in recent trading.

The airline said it now expects third-quarter revenue to be down 24% to 28% from the same period in 2019, compared with previous guidance of a 20% decline. The current FactSet consensus for third-quarter revenue of $9.23 billion implies a 22.5% drop from 2019.

The company said that booked load factor for peak travel periods, including fourth-quarter holiday periods, "remains very strong."

American "saw its strong summer of leisure travel continue into July, with the airline turning profitable ex-special items for the month," Kahyaoglu said in her note. The airline, however, "experienced softness in August close-in bookings and greater cancellations continuing into September."

United Airlines Holdings Inc. shares (UAL) ascended 4.3%, after losing as much as 2.2% before the open.

The company expects third-quarter revenue to be down 33% from 2019, while the FactSet revenue consensus of $8.41 billion implies a 26% decline. United also cuts its capacity guidance to a decline of 28% from a decline of 26%.

But on a bright note, United said the current spike in COVID-19 cases "has been significantly less impactful to date than prior spikes," and is expected to be "temporary" in nature.

"Based on demand patterns following prior waves of COVID-19, the company expects bookings to begin to recover once cases peak," United stated.

United's revenue cut was the sharpest and "likely due to business travel" weakness although the airline did not specify that, Kahyaoglu said.

Among shares of other airlines that warned, Southwest Airlines Co. (LUV) climbed 3.5% and JetBlue Airways Corp. (JBLU) advanced 6.1%.

-Tomi Kilgore

 

(END) Dow Jones Newswires

09-09-21 1206ET

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