In a matter of weeks, since the US Air Transport Association released US airline passenger figures for the month of July, the skies look clear for the major airline companies. Airline stocks are now trading considerably higher. On August 26, US Airways received a late-day surge of call activity indicating a likely upturn in airline stocks.
Yesterday, J.P. Morgan analyst Jamie Baker upgraded airline industry and the stocks excepting three. In a matter of hours, shares of UAL (UAUA) went up 18% to $7.60 and US Airways (LCC) jumped 12% to $4.02. American parent AMR Corp. (AMR) rose nearly 12% to $6.69, Delta (DAL) added 11% to $8.10, and Continental (CAL) rose 6.9% to $14.66. Much of the gain in the stocks is attributed to stock rating upgrades by JP Morgan and Barclays Capital.
Despite the sector being current favorite of analysts, some of the airline stocks have been downgraded. JP Morgan downgraded AirTran Holdings Inc. (NYSE: AAI) and JetBlue Airways Corporation (NASDAQ: JBLU) from Overweight to Neutral, despite still attractive risk-reward and healthy potential upside to price targets. However, AirTran Holdings Inc. (AAI) and JetBlue Airways Corporation (JBLU) are trading up as they have also benefitted from the sector upgrade.
Overall, the Arca Airline Index (AMEX:XAL) is also trading up as the sector was upgraded from Neutral to Overweight by JP Morgan. The benchmark index is now just 5% away from its 52-week high of 28.22 and is up 10% so far this year. Looking at the options activity, the sector, measured by the FAA exchange-traded fund, rallied 6.11% yesterday. The move outpaced a 2.35% gain for the broader transportation index and a 1.04% increase for the S&P 500 Index. Call volume in the airline space outnumbered puts by more than 2 to 1 during the previous 20 sessions. Calls were being purchased while puts were being written over the same period, which further reflected the positive tone. In the broader options market during the same time, calls outnumbered puts by only about 20%, while more calls were sold than were bought. AMR was the busiest airline in the options market yesterday, although most of the activity resulted from investors selling calls to take profits after the stock climbed 12% to $6.69. Other actively traded names included UAL, Continental Airlines, and Delta. Options volume was more than triple the average level for all the individual stocks mentioned in this article.
Looking at the revenues, airline industry revenue declined 20% or more for May, June and July, according to the Air Transport Association trade group. Based on the Air Transport Association trade data, revenue may drop by about 18%-20% through October, then decline by 8%-10% percent and 11% in the final two months of the year. Revenues are likely to pickup in 2010 increasing at 5.5%. Airline companies, many of which looked like ‘gone concerns' now seem to be ‘going concerns' as some of their concerns have receded.
