Why Investors Were Excited Even Though Airline Stocks Lowered Guidance

On Sept. 9, United Airlines (UAL 0.14%) revised its financial guidance down for the upcoming quarter. It didn't take long for other airlines to follow. Yet these stocks popped when that happened. What's going on?

In this video from Backstage Pass, recorded on Sept. 9, Motley Fool contributor Lou Whiteman talks with fellow contributor Jason Hall, breaking down all of what's going on in the airline industry right now as well as what the market might be thinking.

Lou Whiteman: I'm about to talk about an industry that reported bad news and saw the stocks awarded as a result. Then, later, we'll talk about a company that beat and did great, and its stock was off like 10%, because nothing matters anymore. But let's talk about the airlines.

The airlines have already gotten through second-quarter earnings, including the ones in our Fool universe. That's Delta (DAL -0.09%), Spirit (SAVE 0.12%), JetBlue (JBLU 0.28%), Southwest (LUV 1.19%). There's a bunch of them, actually, around Fool services, but the airlines are now looking ahead to the third quarter. United Airlines this morning put out revised guidance, and within an hour, three other airlines had followed up with their own, and it was basically the same thing.

United had said they were going to be profitable in the third quarter, which would been the first time they were profitable since COVID hit -- not so fast anymore. The others -- Southwest, American, and JetBlue -- all chimed in. They all said the same thing, that revenue is going to go down because of the delta variant and the uptick in cases.

In United's case, revenue will be down about 33% from two years ago, pre-COVID, same quarter. American lowered its forecast, I think a decline of like 24% to 28%, from 20%. JetBlue said, smaller base, but they were guiding 4% to 9% down. Now they're saying 6% to 9% And as a result, the stocks were all up. At point I think the entire sector is up more than 5%, gave back some of that.

What's going on here? For one, I don't think a single investor woke up this morning, read United's thing, and found out the delta variant is in the air and the cases were spiking. I think that there has been some inevitability of this coming, and to be honest, it wasn't necessarily as bad as some had feared. United did say, too, that, look, things were going pretty darn well in early July and into July. I think investors are reading that into, maybe, if this is just a temporary spike, the airlines have figured out a way to operate in this environment, which would be a real plus.

The other thing, of course, is the White House today said that all federal workers and millions of government contractors have to be vaccinated against COVID-19. They will not even allow the weekly testing. I don't think we're really bullish on government workers flying, but I think that the government normalizing this is going to go a long way toward other employers following through. The quickest, simplest way out of the pandemic is a vaccinated populace, and we're not going to see airlines fully recovered until we have a vaccinated population.

We're in a weird moment now. They have basically said things are going to stink in the third quarter, but they're not going to be as bad as you might have feared. On today's vote, at least, that is bullish. I don't think this is now the time to buy in on this. I think most employers, some of them, are into 2022 before they're going to come back, and you're not going to see business travel come back when people aren't even in the office. For American, for United to a lesser extent Delta, they are going to need business travel back for them to come all the way back. International travel is still a mess. Look at what Europe did the other day; it restricted U.S. tourists.

If you're invested in any of these stocks in particular, I'd say Delta or Southwest, I would definitely sit tight. I think you're fine, but this isn't the end of the story, and I think the real takeaway here, forget today's little spike. What we learned today from United was this is a reminder that we're not done by a long shot, and that we're still talking 20% to 30% revenue declines over pre-pandemic. It's going to be the second half of this decade before this industry is totally back. If you have a long enough time horizon and you bought in last year, when they were down 80% -- I personally am holding tight. I don't see a problem with that. I don't think COVID can ground these airlines, and I think we've seen that, but I also don't think I would rally in or sell out on the third quarter. I think what we've learned now is the third quarter is a loss and the fourth quarter, unless people decide to go see grandma on Christmas, isn't going to be much better. There's still a not a lot of excitement about the airlines right now.

Jason Hall: In the Foolish universe, JetBlue and Southwest are still active recommendations in a couple of services. I think Spirit was at one point, but it's no longer. But I think if you're interested in this, you focus on the strong companies that are well capitalized and they know how to run their operations through this environment and not get to a point where they are in serious financial trouble.

Whiteman: Yeah. Spirit, I think, actually is the one trade here now, because they've had this miserable summer. The nature of their business is they are going to get a lot of the tourist dollars, and quite frankly, their costs are lower than Southwest. If there's a race to the bottom, which I think the next few months are going to be leading up to Thanksgiving, they can win the price wars even over Southwest. I actually can see them normalizing pretty quickly as the schedule gets right.

Southwest, I think, is much better among the recommendations just for the near term than JetBlue. JetBlue does best when the economy is soaring. JetBlue's bread and butter is that Mint product, which is a wonderful product. It's a premium class. It's a lot better most first classes. That tends to sell best either when business people are flying or when tourists feel flush. If this is more of a price-sensitive environment, JetBlue will be fine, but they're not built to play by the rules of the next few months. I think.

Just bear that in mind, too, especially if you're an investor in there right now. It's still a well-run company, even if the next few months aren't really playing on its home turf. If that makes sense.