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Airlines Stocks & ETF Fly Higher on Stimulus Package

Sanghamitra Saha

Global stocks staged a rally from Mar 24 onward owing to the bleak signs of slowing coronavirus spread in Italy, one of the most severely affected countries, and $2-trillion worth U.S. coronavirus stimulus bill. Asia stocks witnessed its best-day since 2008 while Dow Jones Industrial Average (up 11.4%) recorded the best single-day gain since 1933 on Mar 24.

While all the corners of the market witnessed an upsurge, the most-battered zones or the virus-hit areas bounced back even more as these offer cheaper valuation. One such space is the airlines sector.

The pure-play airlines ETF U.S. Global Jets ETF JETS has lost 48.2% this year so far compared with 24.3% decline in the S&P 500. Amid the heightened global coronavirus scare, the fund recorded a month-long loss of 43% compared with 20.6% retreat in the S&P 500.

However, U.S. government stimulus raft led to a rally in airlines stocks in the past two days with JETS adding 29.7% (as of Mar 25, 2020). The fund is very cheap in terms of valuation with JETS trading at a P/E of 9.55X compared withSPDR S&P 500 ETF SPY’s P/E ratio of 19.67X.

Airlines Industry: The Present Picture

The coronavirus spread resulted in heightened travel restrictions imposed by the government. Status of airline finances became miserable as planes fly almost vacant. People are canceling flights while there are almost no new bookings, per Reuters. S&P downgraded Delta Air Lines’ DAL credit rating to junk lately.

Extremely lackluster demand forced the carriers to cut capacity. American Airlines AAL aims to trim 75% of its international flights to match the extremely bleak demand scenario. United Airlines UAL, which has significant international exposure, recently announced that it will further taper its domestic and international schedules. The carrier declared a 60% schedule reduction for April. The plan is to decrease the number of flights across the United States and Canada to the tune of 42% besides an 85% decline in international flights.

Apart from their streamlining capacities, U.S. grants are benefiting the airline stocks. The package allocates roughly $500 billion backing loans and support to large companies as well as states and cities.

U.S. airlines will be eligible to receive a combined $62-billion federal loans and direct cash assistance to meet their payrolls, of which $25 billion in direct aid will go to passenger carriers, “$3 billion to airline contractors providing ground staff such as caterers and $4 billion to cargo haulers”, per Bloomberg. (read: ETFs to Gain as New US Stimulus Package Gets a Nod).

Notably, airlines, which are at the receiving end of extreme criticism in recent times for their huge buybacks and less cash savings, already agreed to sacrifice stock repurchase and dividends plus limit executive compensation if they manage to secure cash grants.

Airline Stocks Offer Value

Airline stocks offer value with American Airlines having a Value Score of A, Delta Air Lines with a value score of B, United Airlines with a Value Score of A, JetBlue Airways Corporation JBLU with a Value Score of B and Southwest Airlines Co. LUV also with a Value Score of B.

So, investors who believe that the global economy will be soon be free from the coronavirus curse may bet on these stocks and the pure-play fund JETS.

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Southwest Airlines Co. (LUV) : Free Stock Analysis Report
JetBlue Airways Corporation (JBLU) : Free Stock Analysis Report
Delta Air Lines, Inc. (DAL) : Free Stock Analysis Report
United Airlines Holdings Inc (UAL) : Free Stock Analysis Report
American Airlines Group Inc. (AAL) : Free Stock Analysis Report
SPDR S&P 500 ETF (SPY): ETF Research Reports
U.S. Global Jets ETF (JETS): ETF Research Reports
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