Coronavirus Continues to Hurt Airlines : Any Respite Soon?

Maharathi Basu
·4-min read

It is a well-documented fact that stocks in the airline space could not set the stage on fire in 2019 due to headwinds like lackluster cargo business and loss of revenues following flight cancellations stemming from the grounding of Boeing 737 MAX jets. These drawbacks continued to weigh on the airlines as they entered 2020. Despite such downsides, passenger revenues remained strong owing to impressive demand for air travel.

However, with the advent of coronavirus, air-travel demand nose-dived, crippling passenger revenues in turn.

Situation Continues to be Grim as Pandemic Persists

Airlines are gasping for breath even six months after the dreaded disease was declared a pandemic by the World Health Organization on Mar 11. This can be gauged from the fact that the Zacks Airline industry has shed 24.7% of its value since March.

Due to depressed passenger revenues, companies like Delta Air Lines DAL, United Airlines UAL and American Airlines AAL incurred loss in each of the first two quarters of 2020. In fact, the coronavirus impact was more severe on the second quarter than on the March quarter as the entire three-month period (April to June) bore the brunt of this meltdown in air-travel demand as opposed to only a single month (March) in the first quarter of the year.

Moreover, the emergence of fresh cases in Europe and the reimposition of restrictions on many European countries has sparked further trouble for the aviation stocks. For example, Ryanair Holdings RYAAY, currently carrying a Zacks Rank #3 (Hold), announced that it will slash its October capacity by a further 20% due to travel limitations imposed by the European Union governments.

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Q3 Results Unlikely to be Any Better

As mentioned above, airlines are far from being out of the woods as passenger revenues are way below the year-ago levels. Consequently, akin to the first two quarters, the September-quarter results are likely to be bleak as well. In fact, many airlines have come out with tepid third-quarter forecasts as they trim capacity in response to the dwindling demand scenario.

Evidently, Southwest Airlines LUV expects its third-quarter capacity to decline 30-35% year over year. JetBlue Airways JBLU expects scheduled capacity to decline approximately 55% year over year in the September quarter. Delta and United Airlines expect a 60% and 70% drop in their respective capacities for the September quarter. Hawaiian Holdings HA expects third-quarter capacity to slump 87% year over year. The massive capacity cuts are likely to flare up unit costs in the third quarter of the year.

What’s Ahead?

Despite lagging the year-ago readings, airlines are seeing some improvements particularly in terms of leisure-travel demand. Owing to these upsides, some airlines issued bullish cash burn-related updates. Evidently, Southwest Airlines management stated that air-travel demand rebounded in August after stalling in July and this uptrend has continued so far in September. As a result of this recovery, the carrier came out with an upbeat third-quarter view for cash burn. The metric is now expected to be approximately $17 million compared with almost $20 million expected previously.

Moreover, with the current stimulus package set to expire at this month-end, many airlines warned of potential layoffs October onward as they are faced with the problem of overstaffing in the face of waning demand. Notably, airline companies, which accepted the financial assistance under the Coronavirus Aid, Relief and Economic Security (CARES) Act in April, are prohibited from retrenching employees through Sep 30.

The entire scenario of job cuts can, however, be avoided if another round of federal help comes through. Many airline companies are lobbying for another $25-billion worth federal aid to protect jobs through March 2021. However, nothing has materialized yet. As a result, we expect investors to keep track of the updates on the anticipated second-round of federal financial grant for the airlines.

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Click to get this free report Southwest Airlines Co. (LUV) : Free Stock Analysis Report JetBlue Airways Corporation (JBLU) : Free Stock Analysis Report Ryanair Holdings PLC (RYAAY) : Free Stock Analysis Report Delta Air Lines, Inc. (DAL) : Free Stock Analysis Report United Airlines Holdings Inc (UAL) : Free Stock Analysis Report American Airlines Group Inc. (AAL) : Free Stock Analysis Report Hawaiian Holdings, Inc. (HA) : Free Stock Analysis Report To read this article on Zacks.com click here.