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Will Coronavirus-Hit Airlines Regain Lost Ground in 2H20?

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It is a well-documented fact that stocks in the airline space could not set the stage on fire in 2019. Headwinds like lackluster cargo business due to weak freight demand and trade tensions between the United States and China besides loss of revenues following flight cancellations stemming from the grounding of Boeing 737 MAX jets prevented the stocks from flying high last year.

These drawbacks continued to weigh on airlines as they entered 2020. Despite the downsides, passenger revenues remained strong owing to impressive demand for air travel.

Advent of Coronavirus Cripples Air-Travel Demand

All the buoyancy in passenger revenues on the back of bullish demand, however, was negated by the dreaded coronavirus disease (COVID-19), which was declared a pandemic by the World Health Organization on Mar 11. Even though almost all corners of the investing space have been affected by this unprecedented crisis, airlines are among the worst-hit. The fact that the Zacks Airline industry has plunged 23% since the beginning of March against the S&P 500 Index’s 3.2% gain bears testimony to the aviation industry’s severe body blow.

As coronavirus claimed multiple lives apart from infecting scores across the globe, several countries were under lockdown amid wide-spread travel restrictions particularly since March, thereby causing air-travel demand to fade out fast. As passenger revenues account for bulk of the airline stocks’ top line, negligible air-travel demand spelt doom for the carriers in the March quarter. With the key component of their total revenue bases being significantly drained, heavyweights like Delta Air Lines (DAL - Free Report) , Southwest Airlines (LUV - Free Report) , American Airlines (AAL - Free Report) and United Airlines (UAL - Free Report) incurred massive losses in the first quarter of 2020.

Despite the recent moderate improvement in air-travel demand, the second-quarter performance of airlines is likely to have been again dented by below-par passenger revenues. Consequently, the currently Zacks Rank #3 (Hold) Delta expects June-quarter revenues to plunge 90% on a year-over-year basis.

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

What’s in Store for 2H20?

Reopening of businesses in countries around the globe and easing of travel bans bode well for the airline stocks, which are witnessing a surge in new bookings. Evidently, Latin American carrier Azul (AZUL - Free Report) expects to have 240 peak daily departures in July, reflecting an increase of 42.9% from the daily departures in June. Moreover, the carrier aims to resume services to six domestic destinations in the same month, thereby bringing the total number of cities served to 66.

Moreover, owing to the resurgence in demand, American Airlines is booking flights to full capacity from today. Meanwhile, Delta expects to expand capacity by about 1,000 flights in both July and August. Based on this uptrend, many aviation stocks issued upbeat updates pertaining to cash-burn rates. Moreover, the number of people screened by the Transportation Security Administration  displaying an upward trend of late hints at the rebound in air travel.

Another factor working in favor of the airlines in this challenging scenario is their focus on operating cargo-only flights. With air-travel demand at one point of time hitting rock bottom, many carriers including the likes of Delta and Hawaiian Holdings (HA - Free Report) had decided on operating cargo-only flights. In fact, the International Air Transport Association (IATA) expects cargo revenues to climb 8.2% year over year to $110.8 billion in the ongoing year. Moreover, cargo revenues are expected to account for 26% of the top line in 2020 compared with a mere 12% in 2019. Low fuel costs are also benefiting airlines.

Despite the above-mentioned tailwinds, the airline industry has its share of hiccups, which we witness while going into the latter half of the year. Notably, the federal aid to airlines under the Coronavirus Aid, Relief and Economic Security (CARES) Act will sustain jobs only through Sep 30, 2020. However, with passenger demand unlikely to attain the pre-coronavirus levels any time soon, airlines may be forced to trim their workforce in the face of soft revenues. Many carriers in fact, hinted at job-cuts post Sep 30.

Moreover, the recent spike in coronavirus cases in some parts of the United States following resumption of economic activities heightened fears of a second wave of the infection. This is extremely damaging to airlines. In the event of people again preferring to stay home instead of traveling will no way sustain the recent uptick in passenger revenues.

Sad but true, the aviation industry is already estimated to suffer heavy loses to the tune of $84.3 billion in the current year due to the coronavirus-induced crisis, per IATA. Passenger revenues are predicted to tank more than 150% from last-year levels to $241 billion. In the event of a relapse dwindling air-traffic demand, the carriers’ outlook may deteriorate further.

Come what may, we expect investors interested in this not-so-long-ago high-flying space to stay tuned for further highlights on how things pan out for airlines in the second half of 2020.

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