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U.S. Airlines: Is All Well Despite the Coronavirus Relief Law?

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It is a well-known fact that airline stocks did not fly high in 2019 and the beginning of 2020 due to headwinds like lackluster cargo business and revenue loss following flight cancellations because of the grounding of Boeing 737 MAX jets. Even as the downsides persist, the coronavirus pandemic crippled airlines all the more with air-travel demand shrinking.

The extremely sorry state of affairs is reflected in the share price depreciation of leading U.S. carriers, namely Delta Air Lines (DAL - Free Report) , American Airlines (AAL - Free Report) , United Airlines (UAL - Free Report) , Southwest Airlines (LUV - Free Report) , Alaska Air Group (ALK - Free Report) and JetBlue Airways (JBLU - Free Report) , which have declined 50%,51.7%,63.4%,33.7%,56.2% and 48.4%, respectively, since the beginning of February.

Airlines Resort to Various Measures to Tackle Crisis

With airlines witnessing more cancellations than bookings, the companies are seeing a massive drop in passenger revenues, which account for bulk of their top lines.  In fact, many people are unwilling to fly in a bid to stay safe and avoid contracting the COVID-19 from a fellow passenger.

In an effort to combat the coronavirus-induced sharp plunge in demand, airlines are trimming capacity. Evidently, Alaska Air Group’s subsidiary Alaska Airlines aims to reduce 70% of its capacity for April and May. Moreover, United Airlines plans to slash its total scheduled capacity for April by 68% including 90% international capacity reduction. Moreover, the carriers announced a slew of cost-cutting measures. For instance, Delta plans to curb capital expenditures by a minimum $2 billion this year. It is also offering voluntary short-term unpaid leaves, apart from freezing recruitment.

The above measures were clearly not enough as is evident from the fact that airlines sought financial aid from the U.S. government to tide over the ongoing crisis. Consequently, airlines were criticized by some market watchers for their large-scale buybacks, dividend payments and consequently, less cash savings.

Government Stimulus Package: A Reality

After several deliberations, the Senate passed an emergency relief package on Mar 25. The House of Representatives passed the stimulus package on Mar 27 with President Donald Trump legalizing it the same day.

Of the total fund worth $2 trillion, U.S. airlines are eligible to receive roughly $60 billion in loans as well as grants. Per the package, U.S. passenger airlines are eligible to get $25 billion in grants for covering their payroll expenses over the next six months. Moreover, a similar sum is doled out in the form of unsecured loans/loan guarantees.

Will Package Provide Only Near-Term Relief?

Despite the hefty amount, this rescue relief is anticipated to provide only short-term breather to the battered airline stocks. For instance, management at airline heavyweights, Delta and United Airlines, stated that the monetary assistance took care of sustaining jobs only through Sep 30, 2020. Moreover, significantly dwindled air-travel demand will take a long time to rebound even after the coronavirus pandemic subsides. For instance, United Airlines’ CEO Oscar Munoz and president Scott Kirby expect "demand to remain suppressed for months after that, possibly into next year."  

In the event of slow recovery in air-travel demand, management at United Airlines stated that it may condense workforce in the long run. We fear that other airlines may follow suit, in the event of demand remaining stifled for a long time. In fact, the Zacks Rank #3 (Hold) JetBlue’s CEO Robin Hayes warned that "the writing is on the wall" that travel demand will not be restored anytime soon.

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

Moreover, as a condition for receiving the above-mentioned financial help, airlines had to suspend share buybacks and dividends.

Notably, suspension of the above shareholder-friendly measures does not augur well for investors as the lure of steady dividends often leads them to put their hard earned money into the stock market. Thus, this could be another major blow to the already-struggling airline stocks.

Come what may, we expect investor focus to remain on this burning issue. To this end, we advise investors to watch this space for further updates.

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