Robinhood Investors Are Betting on a Travel Stock Recovery — Should You?

Robinhood Investors Are Betting on a Travel Stock Recovery -- Should You?

Airline and cruise stocks are among the most sought after these days among investors trading on Robinhood. American Airlines (NASDAQ:AAL), Delta Air Lines (NYSE:DAL), and Carnival Corp. (NYSE:CCL) are among the 10 most popular stocks on the online trading platform. Amid the coronavirus pandemic, the shares have dropped 60%, 56%, and 71%, respectively, since the start of the year.

Image source: Getty Images.

Do these declines mean you should follow Robinhood investors into travels stocks and bet on a rebound? Keep in mind that many Robinhood users are new investors who often favor stocks they hope will deliver quick gains and/or ones that may rebound from deep losses.

Let’s take a closer look at the companies and the coronavirus situation.

The coronavirus outbreak began in China earlier in the year and has since spread throughout the world. Countries ordered lockdowns or issued stay-at-home recommendations this spring, and travel nearly came to a standstill in many regions.

Cutting capacity

Travel shares felt the impact in the most recent quarter. Delta reported an 88% decline in operating revenue after an 85% drop in capacity. Delta posted a $5.7 billion loss on a generally accepted accounting principles (GAAP) basis. Carnival Cruises paused cruises in mid-March, and sailings haven’t yet resumed. The company posted a $4.4 billion loss on a GAAP basis. And American Airlines reported a $2.7 billion pre-tax loss for the second quarter and predicted third-quarter capacity will be down 60% year over year.

A comment from Delta’s CEO Ed Bastian indicates troubles are far from over. He called the coronavirus impact on the airline’s operations “truly staggering” and said he doesn’t expect to see a sustainable recovery until more than two years from now.

We also can look to the current coronavirus situation in the U.S. and beyond as a guide. The U.S. has surpassed 150,000 deaths from COVID-19, the illness caused by the novel coronavirus, according to Johns Hopkins University. Cases worldwide have reached more than 16.5 million, while global deaths total more than 656,000, the World Health Organization reports. States including Florida, California, and Texas continue to see cases mount. Only some states have ordered the wearing of masks in public in efforts to halt the spread of the coronavirus. All of this means the health crisis is still going strong — and we don’t have a clear idea of when it will abate.

Limited international travel

Meanwhile, the U.S. hasn’t imposed state-to-state travel restrictions but has taken action on international trips. The Centers for Disease Control and Prevention recommends Americans avoid travel to most European countries and several other regions. And most foreign nationals from those areas won’t be allowed entry into the U.S. At the same time, appetite for travel may suffer as people fear possible contamination in airports, airplanes, and on cruise ships.

To face this lengthy disruption, travel companies have made efforts to reduce cash burn and preserve liquidity. Delta has raised almost $15 billion in financing transactions since March. The company said it aims to reach breakeven cash burn by the end of the year. Carnival said it’s raised more than $10 billion through financing transactions and says it continues to seek ways to reduce cash burn. At the moment, it predicts the cash burn rate in the second half will be about $650 million per month. American Airlines raised more than $3.6 billion in the second quarter and reduced its daily cash burn rate to $30 million in June from almost $100 million in April.

Considering the fact that the health crisis is temporary and companies are making immense efforts to stay afloat, is now the time to bet on airline stocks or cruise line shares? I think it’s too soon to follow Robinhood investors into the sectors. Without clues regarding the duration of this crisis, it’s impossible to know how companies will look financially by the time business picks up. So, the right time to make a decision on whether to invest in travel shares is when elements regarding the pandemic’s duration begin to emerge. At that point, we might better understand how long recovery will take — and how each company will manage the process.

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