US Airline stocks surge after the US eliminates mask mandate

Airline stocks of companies based in the United States have kept surging since Tuesday after the country’s top transportation authority effectively discontinued the directive that required individuals to use a face mask when boarding any form of public transportation.

The mandate was eliminated after US District Judge Kathryn Kimball Mizelle from the Middle District of Florida ruled that the Centers for Disease Control and Prevention (CDC) did not follow the appropriate protocols and exceeded its authority when it imposed the measure.

The Transportation Security Administration (TSA) informed that, as a result of the ruling, they were leaving without effect the extension they had imposed regarding the use of face masks, which was expected to last until 3 May.

Shares of American Airlines (AAL) and United Airlines (UAL) were among the most benefitted from the decision and they have kept rising since then. This morning, AAL stock is advancing nearly 10% in pre-market trading followed by UAL shares, which are up almost 9% as well.

Meanwhile, the popular US Global Jets ETF (JETS) has delivered gains of almost 2% so far this month and is surging nearly 5% in pre-market activity today too.

On 23 March this year, Airlines for America (A4A), an industry association that lobbies in favor of commercial aviation businesses within the country, sent a letter to President Joe Biden asking that he removed mask mandates for passengers who traveled by air. The organization cited a recent CDC research report that stated that the country’s population no longer needed to wear masks indoors.

“We are requesting this action not only for the benefit of the traveling public, but also for the thousands of airline employees charged with enforcing a patchwork of now-outdated regulations implemented in response to COVID-19”, the letter stated.

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Airline Stocks – Technical Analysis

Using the JETS ETF as the most suitable security to analyze the outlook of airline stocks from a technical perspective, the price action seems to be approaching some critical thresholds including the upper bound of a long-dated trend line resistance and the 200-day simple moving average.

As a result of this latest rally, the JETS ETF has produced gains of nearly 5.2% while the price is breaking above the two above-mentioned thresholds in pre-market stock trading action this morning.

Momentum oscillators are favoring a bullish short-term outlook as the Relative Strength Index (RSI) is standing at 61 while the MACD has moved to positive territory while crossing above the signal line.

Moving forward, if the price breaks above the $24 level, chances are that the removal of the mask mandate could be interpreted by market participants as the definite turning point for airlines in a post-pandemic scenario and the beginning of what could be a full-blown recovery of the industry as a whole to pre-pandemic figures.

Airline stocks – Fundamental Analysis

At the moment this is written, four airlines account for a bit more than 40% of the total assets of the US Global JETS ETF (JETS). These are United Airlines (UAL), American Airlines (AAL), Delta Airlines (DAL), and Southwest Airlines (LUV).

Of the four carriers, Delta Airlines and Southwest are the only ones that have already moved to positive bottom-line performance.

Meanwhile, of the two businesses, Southwest is the one that has the lowest long-term-debt-to-assets ratio and that is another positive factor to take into account as it makes the company less risky from a fundamental standpoint.

Airlines are getting ready to report their financial results covering the first quarter of the 2022 fiscal year in the next few days and that could be a major catalyst if the senior management of these companies make upbeat comments about how the demand has been recovering in a post-COVID scenario.

Southwest shares are currently trading at 41 times its forecasted earnings per share for 2022 and 15 times its estimated adjusted EPS for 2023 – the year in which airlines are expected to fully recover to pre-pandemic levels.

Before the pandemic started, shares of this airline stock were trading at a similar multiple of their earnings and this means that the market may have already priced in the company’s recovery into the share price.

Thus far, the price of LUV stock is around 20% below its pre-pandemic level but the company is now more indebted than it was back then.

With this in mind, even though the removal of the mask mandate is positive news for airline stocks, most of these positive developments may have been priced in and upside potential could be rather limited from a fundamental standpoint at least.

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