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Four reasons why the airline rally can’t last, says JPMorgan

Airline stocks have taken a beating this week, after JP Morgan analyst Jamie Baker outlined four reasons why the recent rally seen by US carriers will run out of fuel.

Baker said in a Wednesday note to clients: “We do not believe the current pace of equity ascent can be potentially maintained for much longer, for four reasons”.

The analyst for the US bank wrote: “First, TSA [Transportation Security Administration] recovery rates are likely to moderate this fall as corporate demand inadequately backfills pent-up summer leisure travel.”

Next, Baker said: “Valuation [a term that hasn’t been a significant part of our lexicon as of late] is beginning to stretch for some.”

The analyst argued: “Third, Treasury loan decisions are believed to be imminent, and may prove the last easily identifiable near-term catalyst, potentially followed by dilutive equity raises.”

Then Baker wrote: “Lastly, to the extent that bolstered summer schedules helped stoke the recent rally, we worry as to the market’s reaction should airlines begin trimming autumnal schedules once they become responsible for labor costs (recall the government is effectively picking up the tab for wages) and furlough activity crescendos.”

After six consecutive days of gains that pushed its value to the highest level since the 14 May bottom, the popular US Global Jets (JETS) exchange-traded fund, which holds a large portion of major US airline stocks, fell during the past two sessions by 13.8% and it is currently sliding by 9.9% so far during pre-market stock trading activity, trading at around $17 per share.

jets ETF performance year to date

An increased number of day traders have been reportedly speculating with the ETF recently, in hopes that the economic recovery and the easing of lockdown measures could push airlines back to their pre-pandemic levels.

However, the JP Morgan report along with other bad news, including signs of a second wave of the virus in many states in the country, have caused a panic sell-off that is pushing down airline stocks back to their 50-day moving average, an indicator of their short-term strength.

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Alejandro Arrieche

Alejandro is a financial writer with 7 years of experience in financial management and financial analysis. He writes technical content about economics, finance, investments, and real estate and have also assisted financial businesses in building their digital marketing strategy. His favorite topics are value investing and financial analysis.