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Airline Industry's Outlook Takes a Beating From Coronavirus Jinx

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The Zacks Airline industry includes companies engaged in transport of passengers and cargo to various destinations globally. Most operators maintain a fleet comprising multiple mainline jets in addition to several regional planes. Operations are aided by their regional airline subsidiaries and third-party regional carriers. Additionally, industry players make use of their respective cargo divisions for offering a wide range of freight and mail services.

The space consists of legacy carriers like American Airlines (AAL - Free Report) , low-cost players, such as Southwest Airlines (LUV - Free Report) and regional operators, namely SkyWest. Within this low-cost segment, there are ultra low-cost carriers like Spirit Airlines.

Let’s take a look at the industry’s three major themes:

  • The advent of the coronavirus pandemic crippled air-travel demand, thereby hurting passenger revenues big time. Consequently, the airlines’ top line suffers anadverse impact as passenger revenues form the largest component of their total revenue base. As an evidence, February air traffic touched the lowest level since the 9/11 terror attacks on the United States in 2001. The traffic picture is likely to get bleaker in the coming months.  In fact, with the health hazard showing no signs of waning, air-travel demand is likely to remain stressed atleast in the near term. Anticipating such a gloomy scene going forward, Delta Air Lines (DAL - Free Report) warned that revenues in second-quarter 2020 (Apr-Jun period) are likely to be down 90% year over year. The International Air Transport Association (IATA) expects 2019 passenger revenues to shrink by $314 billion on a year-over-year basis.
  • With air-travel demand witnessing a drastic fall, airlines including the likes of Delta and JetBlue Airways (JBLU - Free Report) slashed their capacity. Moreover, they have been compelled to take various cost-cutting measures like putting a freeze on hiring and deferring capital expenses. However, these desperate moves seem inadequate for the battered airline stocks to stay afloat, which is evident from the US airlines’ application for a financial aid from the government to tide over the ongoing crisis. Moreover, airline players like Alaska Air (ALK - Free Report) and Delta suspended share buybacks and dividends as a condition for seeking federal financial support. In fact, airlines were roundly criticized for pursuing government aid as prior to the COVID-19 outbreak, they had not indulged in prudent savings and spent rather lavishly on rewarding their shareholders through dividends/buybacks.
  • On Apr 14, U.S. passenger airlines agreed in principle to a $25-billion rescue package under the Coronavirus Aid, Relief and Economic Security (CARES) Act per the U.S. Treasury Department. According to the deal, major carriers will receive 70% of the funds in cash that need not be paid back. But the rest 30% of the economic stimulusneeds to be repaid. The $25-billion grant definitely provides a much-required relieffor the airline industry. Moreover, with passenger revenues dwindling, thecarriers’ focus on cargo revenues to boost their top line looks encouraging. The focus on the cargo unit can be gauged from the fact thatAzul’s (AZUL - Free Report) cargo business unit registered a 36% increase in first-quarter 2020 revenues. Low fuel price is also a favorable development for airlines and should support bottom-line growth.

Zacks Industry Rank Indicates Dim Outlook

The Zacks Airline industry is a 28-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #213, which places it in the bottom 16% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate.

Before we present a few stocks that you may want to retain, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags Sector & S&P 500

The Zacks Airline industry has lagged the broader Zacks Transportation Sector as well as the Zacks S&P 500 composite over the past year.

The industry has declined 52.3% over this period compared with the broader sector’s decrease of 24.8% as well as the S&P 500’s 2.6% dip.

One-Year Price Performance



 

Industry’s Current Valuation

On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA), which is a commonly used multiple for valuing airline stocks, the industry is currently trading at 3.68X compared with the S&P 500’s 10.4X. It is also below the sector’s trailing-12-month EV/EBITDA of 6.43X.

Over the past five years, the industry has traded as high as 7.01X, as low as 3.35X and at the median of 5.98X.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio


 

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio



Bottom Line

The near-term prospects of the airline industry are marred by the advent of this pandemic, which apart from infecting scores across the globe claimed multiple lives. With airlines witnessing more cancellations than bookings, their passenger revenues see a massive drop as the same accounts for bulk of their top line.  In fact, most people are unwilling to fly in a bid to stay safe and avoid contracting the COVID-19 contagion from a fellow passenger.

Even though the government package is a positive development, it is unlikely to provide cushion to airlines’ crisis beyond a few months down the road.The package will take care of sustaining jobs only through Sep 30, 2020. However, the current scenario of extremely tepid air-travel demand is unlikely to recover the pre-coronavirus levels any time soon. As a result, United Airlines’ (UAL - Free Report) CEO Oscar Munoz and president Scott Kirby expect "demand to remain suppressed for months after that, possibly into next year."

However, the focus on cargo revenues and the decline in oil prices bode well for the industry participants amid this unprecedented emergency.

Consequently, we mentioned stocks like Delta, LATAM Airlines (LTM - Free Report) and United Airlines, which we believe, investors should retain in their portfolio despite the current turbulence as they all carry a Zacks Rank #3 (Hold).

  5 Stocks Set to Double 

  Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth. 

  Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor. 

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