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Can Federal Loans Bring U.S. Airlines Back From the Brink?

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It is a well-known fact that among all the affected corners of the investing world, airlines are one of the worst-hit industries by the coronavirus pandemic. The global health peril placed several countries on lockdown coupled with wide-spread travel restrictions after being declared a pandemic by the World Health Organization on Mar 11. With people confined to their homes, air-travel demand experienced a massive meltdown (particularly since March).

Notwithstanding the above scenario, the aviation sector breathed a sigh of relief when air-travel demand started picking up from the second half of May as economies began to reopen. However, coronavirus cases spiked in some parts of the earth following the relaxation of shutdowns. For example, a few states in the United States have been reporting a surge in new cases over the past few days, stoking the fears of a second wave. Per a Reuters report, 15 states in the country reported a record spurt in new cases of COVID-19 within the first four days of July.

Spike in Cases Dampens Hopes

The relief to U.S. airlines owing to the uptick in bookings turned out to be short-lived due to the sharp rise in cases. This is understandable from the bearish commentary of United Airlines (UAL - Free Report) , which carries a Zacks Rank #3 (Hold) at present. Management at this Chicago-based company stated that due to the relapse in COVID-19 cases, bookings were hurt. Consequently, it does not expect a linear path to recovery in travel demand.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Due to the recent depressing demand trends, management further added that capacity for August 2020 is expected to be down approximately 65% year over year including adjustments that the carrier aims to make to the previously announced August schedule.

What is more alarming is that the carrier warned of furloughing or laying off multiple employees starting Oct 1, 2020. Notably, the payroll support program under the CARES Act will take care of sustaining the airline jobs only through Sep 30, 2020.

United Airlines’ downbeat update resulted in its 7.6% stock price depreciation on Jul 7. In fact, this assertion hampered other airline stock movements as well. For instance, both Delta Air Lines (DAL - Free Report) and American Airlines (AAL - Free Report) shed 5% and 7% of value, respectively. Consequently, the NYSE ARCA Airline Index declined 4.2% on Jul 7. Akin to United Airlines, Delta alerted its pilots about potential furloughs due to bleak demand. Moreover, it may trim its previously announced August flight schedule.

Airlines Seek Federal Loans to Stay Afloat

With the recent resurgence in cases mitigating the upswing in demand, airlines have been dealt a body blow. With demand failing to recover, carriers face the problem of overstaffing, inducing warning of job losses.

In such a grim situation, airlines signed letters of intent pertaining to their share of the $25-billion federal loan under the CARES Act.  Notably, the Treasury Department confirmed that Alaska Airlines, Delta, JetBlue Airways (JBLU - Free Report) , United Airlines and Southwest Airlines (LUV - Free Report) signed the letters on terms of the financial aid, thereby joining five other carriers including American Airlines, SkyWest (SKYW - Free Report) and Spirit Airlines (SAVE - Free Report) , who signed last week. Notably, per the CARES Act, an amount worth $25 billion is set aside for loans to cash-strapped U.S. airlines apart from the grants already awarded.

The Path Ahead

Although, the signing of the letters of intent does not mean that airlines are obligated to borrow loans, we expect them to avail of the same to bolster their liquidity position. With the recent upswing in bookings being somewhat reversed due to the escalation in coronavirus cases, evident from the United Airlines’ update, airlines may face cash crunch once the payroll backing program expires on Sep 30. This, in turn, might lead to multiple job cuts in the industry, which is already indicated by many airline majors.

Confronted with such a gloomy scenario, acceptance of the federal loans seems the only logical way forward. Per U.S. Treasury secretary Steven T. Mnuchin: “We look forward to working with the airlines to finalize agreements and provide the airlines the ability to access these loans if they so choose.”

Come what may, we expect investors interested in this not-so-long-ago high-flying space to keenly await the latest notifications on the airlines’ decision on the federal loans.

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