Airline stocks have surged in the last week after optimistic trends in travelers since Memorial Day weekend and steps by carriers to boost schedules.
As much as airlines are enjoying the upswing in value, the U.S. Treasury Department may be among the biggest winners after getting concessions during stimulus negotiations that included more than 32 million shares in publicly traded airlines.
By mid-day Monday, those “warrants” would net the federal government about a $300 million profit if the Treasury cashed out now. The warrants give the Treasury the right to buy stock for a price agreed to in early April, the worst period for airline traffic and stock prices. Those warrants were among the conditions airlines agreed to in order to get the cash needed to survive, along with agreements to not pay dividends or buy back shares, limits on executive pay and a prohibition from laying off or furloughing employees or cutting pay.
As the stock market creeps back towards record territory thanks to a recent rally, airlines have been amongst the biggest winners after falling to historic lows during the last two months with the COVID-19 pandemic forcing carriers to fight for their financial lives.
Fort Worth-based American Airlines’ stock started the year around $29 a share but fell as low as $9.04 on May 15 as concerns about high debt levels and a long road to recovery. Some analysts and industry insiders wondered if American Airlines would have to file for bankruptcy. Berkshire Hathaway, which owned about 10% of the shares in the biggest carriers, dumped all of its airline stock in late April.
Since then, airlines have gained strength on Wall Street as bankruptcy concerns have dwindled.
On Monday, American Airlines’ stock price peaked at about $20 a share for the first time since February after reporting that it was increasing its flight schedule for July. That’s added more than $4 billion in value back to the company’s public evaluation.
It’s also made the U.S. Treasury Department look like a wise investor. As part of the $5.8 billion in grants and $1.7 billion in loans given to American in April, the carrier agreed to hand over what amounts to stock options on 13.7 million shares of American Airlines. The Treasury Department has the right to exercise those options at any point during the next five years at $12.51 a share.
That’s about a 58% gain and a profit of more than $100 million based on American’s stock price on Monday.
Other airlines have gained, too. Southwest shares are up about 22% during the last week alone. Southwest shares never fell as low as other airlines because it has less debt and less international business.
Still, the Treasury Department’s stock options in Southwest would profit about $8.6 million if sold now. The Treasury Department’s shares in United are worth about a $70 million profit and Delta would bring in $76 million.
The U.S. Treasury Department did not respond to a request for comment about when or how it plans to exercise its options to buy airline stocks.
The U.S. Treasury could get even more options to buy airline stocks at the low price agreed to nearly two months ago. American Airlines has applied for an additional $4.75 billion in loans and would give up about 38 million more warrants for shares. Those shares again would be available for $12.51 a share, an American Airlines spokesman said. After gains Monday, that would give the federal government another $274 million in profit.
Analysts say airline stock prices are going up so fast because investors are betting on a broad recovery in the travel and airline industry. A major electronic traded fund has gone from $400 million in investments to more than a billion since the beginning of March, said Helane Becker, an analyst with Cowens.
Analysts are also skeptical that airline stock prices are going up while companies are losing money. American Airlines said it will lose $50 million to $70 million a day in the second quarter. Southwest Airlines is losing $20 million to $30 million a day.
Even with a slight recovery in passengers, airlines are only getting about 17% as many travelers as they did a year ago, according to Transportation Security Administration statistics.
Both American Airlines and Southwest Airlines have offered buyout packages to employees and warned that staff cuts will be necessary if they can’t reduce expenses enough by the fall.
“If a firm loses money in the best of times, it seems highly likely to us it will do the same in the worst or average times, which we expect for at least the next two to three years for airlines,” said Colin Scarola, an analyst with CFRA. “Accordingly, we find AAL’s recent run-up to be based on sentiment, not fundamentals, and advise avoiding the shares.”
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