Quarantines and stay-at-home orders are starting to lift across the United States, with many locales preparing to reopen retail stores and restaurants for at least limited indoor operations. Airline carriers around the world hope that the worst is past, but as Warren Buffett's recent sales disclosure pointed out, not everyone is convinced that the travel industry will spring back to life in the next one or two quarters.

Many analysts believe that travelers will stay away from airports in coming months, waiting to see if the lifting of restrictions triggers a dreaded "second wave" of infections. In addition, airlines are now implementing safe distancing in their fleets, lowering passenger capacity and revenues into the indefinite future. Plans to hike fares to make up for these lost seats could backfire, delaying a recovery that many smart folks expect will take two to three years.

Airline stocks are trading close to March lows right now, despite strong bounces throughout the market universe, highlighting weak demand. It's no surprise because they brought exceptionally weak balance sheets into this crisis, pumping years of profits into buybacks and executive bonuses rather than building cash reserves, and the companies now need the government's help to survive. In turn, this raises the odds for secondary offerings that will dilute already depressed shares. 

These poorly managed companies were weak market performers throughout the second half of the economic expansion, failing to reward shareholders, so any commentary insisting that the group will return to prior highs should be viewed with skepticism. More importantly, these issues can easily drop to new lows, continuing a bear market that might persist for months or years.

Chart showing the share price performance of United Airlines Holdings, Inc. (UAL)
TradingView.com

United Airlines Holdings, Inc. (UAL) stock completed a round trip into the 2007 high in the lower $50s in 2014 and broke out a few months later, stalling in the mid-$70s. It completed a breakout above that level in the fourth quarter of 2018, but buying interest failed to develop, yielding dead sideways action ahead of a March 2020 breakdown that cut through support at the 2017 and 2016 lows. Price action since that time has failed to remount either barrier.

The decline found support at the .786 Fibonacci rally retracement of the 2008 to 2018 uptrend, a common turning point after a major decline. The monthly stochastic oscillator crossed higher at an extremely oversold level at the same time but still hasn't issued a buying signal. Even so, a bounce into 2016 resistance appears more likely than a quick plunge to new lows at this point, with the stock's fate riding on its ability to remount that level.

Chart showing the share price performance of American Airlines Group Inc. (AAL)
TradingView.com

American Airlines Group Inc. (AAL) stock sold off from $63 to $1.45 during the economic collapse and turned higher into new decade, gaining ground in a retracement that stalled within seven points of the prior peak in early 2015. The stock got cut in half in the next 18 months, bottoming out at a two-year low in the $20s in June 2016. The subsequent bounce completed a round trip into the prior high in January 2018, yielding a breakout that failed within four points of 2007's all-time high.

The subsequent decline continued through 2019, accelerating in February 2020. It broke 2016 support at the same time, ahead of continued downside that cut through the .786 Fibonacci retracement level of the 2008 to 2018 uptrend. The subsequent bounce lasted for just three days before stalling at $17.24, ahead of a new low in early April. The stock is now testing that critical support level and could break down, finally reaching the deep 2008 low at $1.45.

The Bottom Line

Airline stocks are struggling near sell-off lows due to continued headwinds and could break those levels in coming weeks.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.