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Airlines Brought to Their Knees by Coronavirus: What's Ahead?

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The dreaded coronavirus disease (COVID-19), which was declared a pandemic by the World Health Organization on Mar 11, has been a nightmare for stocks, keeping investors on the edge.

Due to his health hazard, which has claimed multiple lives apart from infecting many more across the globe, the S&P 500, Nasdaq and the Dow Jones plunged to their historic lows on Mar 12, resulting in the end of the 11-year bull run.

Due to coronavirus woes, the S&P 500, Nasdaq and the Dow Jones have tanked 16.1%, 12.2% and 18.8%, respectively, so far this year, paring last year’s impressive gains.

Jolted Airlines Take Actions to Meet Dwindling Demand

Even though coronavirus-related fears have rattled most sectors, travel-focused stocks, which include airlines, have borne the brunt of the outbreak. Evidently, the Zacks Airline industry has shed 35.9% of its value since the commencement of February compared with the S&P 500 index’s loss of 15.9% in the same time frame.

With international travel demand dwindling due to the rapid spread of this highly infectious disease, airline stocks are getting clobbered. With the disease spreading to countries like Italy, South Korea, Iran, the United States and Germany, many people are unwilling to fly to stay safe and avoid contracting the disease from a fellow passenger.

In a bid to fight coronavirus-led low demand for air-travel, airlines from all corners of the globe are trimming their capacity. With Italy suffering the most due to COVID-19 in Europe, European carrier Ryanair Holdings (RYAAY - Free Report) , sporting a Zacks Rank # 2 (Buy), lowered its 2020 traffic forecast by 3 million to 151 million. Also, Air France KLM (AFLYY - Free Report) suspended all its flights to/from Italy from Mar 14 through Apr 3.

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

Airline companies based in the United States too have resorted to various measures for tackling the coronavirus-led sharp drop in demand.  Evidently, Delta Air Lines (DAL - Free Report) will slash overall capacity by 40% in the next few months, the highest in its history, including 2001, as air travel demand sees a rapid fall and revenues take a hit. Moreover, American Airlines (AAL - Free Report) aims to cut international flights by 75% to match the extremely-low demand scenario. United Airlines (UAL - Free Report) aims to trim capacity by almost 50% in April and May.

Also, to combat the drop in demand, airlines are reducing capital expenses, discretionary operating costs as well as suspending share buybacks.

More Turbulence Down the Road?

Even though the 30-day ban on travel to the United States from 26 European countries announced last week by President Trump (expanded subsequently to include UK and Ireland) is aimed at preventing further spread of the disease, the development implies a further setback to the already beleaguered airline stocks. Moreover, a ban on domestic air travel is also being reportedly considered to prevent the spread.

With demand fast-disappearing and the scenario unlikely to improve at least in the near term, first-quarter earnings are likely to be hurt severely by this pandemic.  For instance, United Airlines, which has already withdrawn its guidance for first-quarter 2020 and the full year as well, expects March revenues to be $1.5 billion lower than March 2019. Also, Southwest Airlines (LUV - Free Report) recently issued a bearish unit revenue guidance for the March quarter due to coronavirus-led low demand. First-quarter operating revenues are expected to decline between $200 and $300 million.

Moreover, the International Air Transport Association currently expects airline passenger revenues for 2020 to be hurt in the $63-$113 billion band.


The above write-up indicates in no uncertain terms that the airline industry, which even before the coronavirus outbreak was suffering from issues like prolonged grounding of Boeing 737 MAX jets, has been dealt a body-blow. What is more alarming is that the situation is likely to get worse at least in the near term.  With the adversity showing no signs of abating, revenues in the upcoming summer season, usually considered to be the busiest time for U.S. airlines, are likely to be hit badly.

In a bid to help U.S. airlines combat this unprecedented crisis, the U.S. administration is considering financial help to airlines. Watch this space for further updates on the coronavirus and its resultant impact on the airline industry.

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