Saudi Arabia went bottom fishing in the U.S. stock market last week. A handful of stocks benefitted, and beleaguered planemaker Boeing (NYSE:BA) was one of them.
The kingdom’s $300 billion Public Investment Fund revealed that it bought up $714 million worth of BA stock to diversify its portfolio away from oil.
The news perked Boeing stock up, and the gains accelerated on positive coronavirus vaccine news. Boeing wasn’t alone in its ascent; airline stocks rose across the board on renewed optimism.
Vaccine a Game-Changer for Airline Stocks
Perhaps the most promising news for airline stocks came from biopharmaceutical firm Moderna (NASDAQ:MRNA). Investors cheered the firm’s promising test results from its coronavirus vaccine trials, where all 45 human participants developed Covid-19 antibodies following treatment.
The testing data show the vaccine has an impact on coronavirus patients even in small doses. A press release from Moderna celebrated the early success and injected a healthy dose of hope into financial markets:
With today’s positive interim Phase 1 data and the positive data in the mouse challenge model, the Moderna team continues to focus on moving as fast as safely possible to start our pivotal Phase 3 study in July and, if successful, file a BLA. We are investing to scale up manufacturing so we can maximize the number of doses we can produce to help protect as many people as we can from SARS-CoV-2.
Airline stocks, in particular, saw a surge of optimism because a vaccine is the only hope for the sector to get back to normal.
New Regulations an Interim Solution
This weekend, the European Commission revealed potential changes to the way people travel to get planes back into the air. Among them were temperature checks at the airport, reduced passenger capacity, and limited interaction between passengers and crew. The suggestions are supposed to control the spread of coronavirus while still allowing air travel to continue.
On the one hand, the news helped bolster hopes that airlines can restart operating without a vaccine on the table. But on the other hand, the new procedures mean costs will rise for airlines and, in turn, passengers. That’s terrible news for the industry overall, especially as the global economy trudges through one of the most severe downturns in history.
Not only will many people be nervous about flying because of the coronavirus, but they also can’t afford it if they’ve lost their job or taken a pay-cut.
Airlines will have to cope with lower passenger loads to accommodate new boarding procedures and on-board social distancing requirements. None of that is sustainable in the long-term. According to Ryanair boss Michael O’Leary, such measures are “nonsense.”
Legitimate Rally or Falling Knife?
With Boeing shares up more than 12% so far on Monday and the NYSE Airline Index up a whopping 11%, investors are likely wondering whether this is a rally worth chasing. The answer to that depends on how you plan to pursue it.
BA stock is perhaps the riskiest bet because the company’s prospects look bleak even in the rosiest scenario. The firm still needs to resolve its 737 MAX issues, and although a vaccine would add a tailwind to the air travel industry, it will still take time for demand to return to normal. With that in mind, most airlines aren’t going to be buying new planes.
In the airline sector, Southwest (NYSE:LUV) is one of the most promising plays. LUV stands out from the pack because of its strong cash position and minimal debt, which means the company has more room to maneuver through the economic downturn.
Fund manager Daniel O’Keefe says Southwest is in the best position to grab market share as other carriers go bust trying to slog through the coronavirus uncertainty.
[A US carrier going out of business] will be of enormous benefit to Southwest. They are in the best position to take market share when the others are clearly impaired.
Disclaimer: This article represents the author’s opinion and should not be considered investment advice from CCN.com. The author holds no investment position in the above mentioned securities.
This article was edited by Sam Bourgi.
