- Airline stocks plunged by double digits as investors realized their horrid financials.
- American Airlines, as an example, is burning through $40 million in cash per day to cover daily costs.
- JPMorgan and Citi analysts doubt the upward trend of airline stocks is sustainable.
Robinhood-using millennials and retail traders thought they outsmarted Warren Buffett with airline stocks. Then, it all came crashing down.
On June 12, the three biggest U.S. airlines saw their stocks plunge by double digits.
The stocks of United Airlines, American Airlines, and Delta Air Lines dropped by 16.11%, 15.51%, and 14.03% respectively,
Why Are Airline Stocks Plunging Now?
Prior to the sudden correction of the U.S. stock market, CCN.com reported top hedge funds in Asia are increasingly shorting equities.
Stocks in the U.S., China, Hong Kong, and Europe saw decent gains throughout June. But, geopolitical risks and the fear of a second wave of the virus left uncertainty in the market.
Hedge funds hold more than $591 billion in cash while money markets added over $1 trillion in cash. If the near-term stock market was to reverse, a sharp pullback was likely.
For that reason, the smart money was never onboard on the recent stock market rally.
Compared to other stocks, airline stocks were always more vulnerable since March due to their financials.
Airlines prioritized minimizing operational costs and expanding their cash reserves to last throughout the pandemic, driving the confidence of retail investors.
But, Citi managing director Mark Manduca said the airline industry could struggle to become profitable in the future.
In the long-term, declining profits can pose an existential threat to airlines considering that a small drop in passengers can majorly affect profit margins.
He said on CNBC’s Capital Connection:
It’s not a crazy supposition to assume that the airline industry will struggle actually to get profitable again.
The issues Manduca pinpointed are exactly what Buffett warned about at the annual shareholder meeting of Berkshire Hathaway.
At the time, Buffett emphasized that airlines have changed and Berkshire does not see a healthy trend for the airline sector.
Buffett noted:
I don’t know if Americans have now changed their habits or will change their habits because of the extended period.
Despite the glaring risks in the airline sector, Buffett was criticized for selling Berkshire’s airline stocks.
During a White House address on June 5, U.S. President Donald Trump said Buffett made a mistake selling airline stocks.
President Trump said:
I have a lot of respect for him. They made a mistake. They should have kept the airline stocks.
Even JPMorgan is Out
Institutions are becoming increasingly cautious about airlines as the U.S. reopens its economy.
JPMorgan analyst Jamie Baker said in a note to clients that the upsurge of airline stocks will likely come to an end in the near-term.
Baker warned:
We do not believe the current pace of equity ascent can be potentially maintained for much longer.
Airlines are burning through cash to pay leases for aircraft and employee salaries. Yet, industry executives remain uncertain on the rebound of airline companies.
American Airlines, for instance, is spending $40 million per day to cover basic expenses.
Chief Executive Doug Parker said he cannot predict the demand for flying in the peak season of 2021, putting the industry at a standstill.