It is widely known that airline stocks are currently reeling under the adversity of coronavirus outbreak. The dreaded coronavirus disease (COVID-19), which was declared a pandemic by the World Health Organization on Mar 11, claimed numerous lives across the globe apart from infecting scores. Consequently, economic activity took a huge beating with many countries/areas on lockdown by order and people staying indoors.
Even though coronavirus-related fears rattled most sectors, the space housing airline stocks, was severely jolted by the outbreak. Evidently, the Zacks
Airline industry has shed 60.9% of value since the start of February compared with the S&P 500 Index’s loss of 28.9%. Outbreak to Hurt Earnings
Due to the pandemic, a huge number of flights were cancelled by carriers as many people are unwilling to fly in a bid to avoid infection from a fellow passenger.
With passenger traffic dwindling, performance of carriers is likely to take a huge hit at least in the near term. For example, Delta Air Lines (
DAL - Free Report) expects its second-quarter 2020 (April-June) revenues to be $10 billion less, implying an 80% decline from the year-ago reported figure. United Airlines ( UAL - Free Report) , which decided to cut 95% of its international schedule for April due to the extremely-low demand scenario, now expects March revenues to be down $1.5 billion, indicating a decrease from the prior-year reported number. This Zacks Rank #3 (Hold) Chicago-based carrier also withdrew its first-quarter 2020 and full-year guidance. VIDEO
Southwest Airlines (
LUV - Free Report) also withdrew its 2020 guidance as the company sees a massive coronavirus-induced fall in passenger bookings and a significant rise in close-in trip cancellations for March as well as the second quarter of 2020. In fact, JetBlue Airways’ ( JBLU - Free Report) CEO Robin Hayes warned that "the writing is on the wall" that travel demand will not be restored anytime soon.
see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Airlines Looking for Cash Infusion
With airlines witnessing a sharp drop in passenger revenues due to weak demand, it is natural that carriers’ financial positions are being stressed and are therefore looking to bolster their liquidity. Evidently, to enhance liquidity, Delta entered into a $2.6-billion secured credit facility. Moreover, the company is drawing $3 billion under its existing revolving credit facilities. Furthermore, American Airlines (
AAL - Free Report) recently secured a $1-billion loan to strengthen its financial standing.
Moreover, to stay afloat in this unprecedented crisis, US airlines sought federal help to the tune of more than $50 billion (through loans, grants and tax relief), per Airlines for America (A4A). The amount required is more than thrice the size of the bailout package post 9/11 terror attacks.
Notably, airlines are looking for assistance worth up to $25 billion via grants for passenger air carriers and $4 billion for cargo carriers to address the existing liquidity crunch. Additionally, a similar amount is being pursued by A4A in the form of unsecured loans/ loan guarantees. Also, a tax relief for the battered airlines is in demand.
Hopes of Cash Grant Appear Bleak
Highlighting the need for financial assistance, CEOs of major U.S. airlines and cargo carriers are of the opinion that "Time is running out" and "draconian measures" such as furloughs may now be necessary.
In return for the above assistance, carriers agreed on certain conditions like a cutback in the pay of executives, promises of not laying off through Aug 31 and forgoing dividend payments and stock repurchases. However, according to four congressional aides and airline officials, airlines may not be successful in their endeavors to secure $29 billion in cash grants.
Whatever be the final outcome, we expect investor focus to remain on this burning issue. To this end, we advise investors to watch this space for further developments on how assistance is finally meted out to cash-strapped airlines and the measures undertaken to meet that crunch.
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