Airline stocks are struggling and the crisis is far from over

Airline stocks, such as Delta, United and American Airlines, have been disproportionately hit because of the coronavirus pandemic, and hopes of a quick recovery are beginning to fade


It’s official: the last quarter saw the Dow Jones and the FTSE 100 suffer their biggest losses in more than 35 years. The COVID-19 pandemic has hit the economy in ways that were previously unimaginable. In the United States, more than 6.6 million people sought unemployment benefits in the final week of March. Before the crisis began, the record number of jobless claims had stood at 695,000, and that was set in 1982.

Unsurprisingly, airline stocks have been worst affected by the bloodbath. Travel restrictions brought about by the coronavirus have caused bookings to collapse and planes to be grounded. Industry giants are requesting government bailouts if they are to have any chance of survival. Worse still, there’s no end in sight – and air travel might not return to normal for several months. Even if some companies begin to recover, airline shares may be down in the dumps for a while.

Here are some fast facts about what airline stocks are dealing with. United Airlines says that it is losing more than $100m in sales on a daily basis – a figure that could deepen as coronavirus cases increase in the US. United is already cutting services during the crucial summer season to the bone, even though it is several months away. The embattled company will only be operating with 40 per cent of its international capacity, and the launch of new routes has been suspended.

0'>United is definitely one of the airline stocks to watch. The company’s president, Scott Kirby, has been forthright about the challenges that lie ahead. He had previously predicted that airline shares like his own could rebound quite quickly when the number of new COVID-19 cases began to subside – much like the recovery staged following SARS and MERS – but he now believes it will take a lot longer for things to return to normal.

Airline stocks news

Collectively, airline stocks in the three biggest carriers in the US have plunged by more than 55 per cent year to date. Delta has a market cap of $14.52bn at the time of writing, while United's stands at $5.46bn and 0'>American Airlines at $4.29bn. Add this altogether and you get $24.3bn.

Delta Air Lines
Daily change
Low: 34.65
High: 35.58

A powerful illustration of how the coronavirus has affected the dynamics of the stock market, and airline stocks today, is provided by the performance of Zoom Video Communications Inc. Traded on the Nasdaq, it now has a market capitalization of $34bn – considerably more than all three of these airline stocks combined, with about $10bn to spare. This video conferencing service was little known before the pandemic began.

Zoom Video Communications, Inc.
Daily change
Low: 73.82
High: 76.96

Airline industry stocks have faced the prospect of some reprieve in the form of a bailout from the US government. Up to $50bn is being made available for companies in distress. Half of this is being earmarked to pay the wages of staff who are being furloughed because planes are grounded – potentially for the next six months. The other half is being presented as loans that would need to be paid back – and on top of this, it’s possible that the government would also want compensation in the form of airline stocks or equity. Although this could help resolve some short-term problems, it’s highly likely that it would affect the performance of airline shares in the long run.

The big challenge for airline stocks is having enough capital to see them through this unprecedented time of turbulence. Many operators will be trying their hardest to avoid taking taxpayer funding and giving the government a slice of the pie. However, the alternatives are equally unpalatable. Assets such as planes and coveted flight slots may need to be sold or mortgaged so airlines can stay afloat. In order to save airline stocks from falling further, companies may also seek to generate funding by pre-selling air miles to card issuers – rewards that the likes of 0'>American Express often use to lure in customers. This could unlock billions of dollars’ worth of capital, but it’ll be revenue that they’ll be deprived of in years to come.

Even if the worst-case scenario plays out before our very eyes, some analysts believe that there are airline stocks that are simply too big to fail. Mark Tepper, the CEO of Strategic Wealth Partners, believes that 0'>Delta and United are simply “too big to fail” because of how they provide critical infrastructure for the US. That said, he has warned that a “long-lasting psychological scar” for consumers could affect carriers who mainly focus on regional, short-distance services.

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Are there any good airline stocks to invest in?

If you were looking for airline stocks to invest in outside of the United States, you may want to think again. Although the likes of China appear to be recovering from the coronavirus pandemic, with business operations starting to return to normal following a substantial fall in the number of new domestic cases, the problems don’t end here. Airline stocks in Asia are going to continue suffering because travel restrictions continue to prohibit services to the US and Europe. International routes will only begin to be reinstated when countries worldwide have managed to flatten the curve and dramatically reduce the spread of the coronavirus.

Investing in airline stocks in Europe is proving equally unappetising. EasyJet, one of the best-known budget carriers, has taken the extraordinary step of grounding its entire fleet of aircraft for at least two months. The company had been planning to invest £4.5bn in its operations, primarily on new planes, but it’s likely this expenditure will be put on ice. This is going to have a knock-on effect to suppliers in the airline stock market such as 0'>Airbus and 0'>Boeing, the second of which has already been licking its wounds following two fatal crashes involving its 737 MAX planes.

Daily change
Low: 172.86
High: 182.9

Heathrow Airport, one of the world’s most congested air hubs, has announced that it is shutting one of its two runways following on from the dramatic reduction in flights. Over 30,000 staff are being suspended by British Airways, although they will still receive 80 per cent of their salary thanks to a furlough scheme unveiled by the UK government. A whopping 95 per cent of 0'>Lufthansa ’s fleet are grounded, and the German aviation giant is only performing flights to repatriate stranded tourists. The rest of its services have been cancelled until the beginning of May at the earliest.

No two ways around it, investing in airline industry companies is fraught with risk at the moment. Sadly, it’s plausible that some carriers simply won’t survive: in the UK, where a series of major airlines collapsed even before COVID-19 existed, Thomas Cook, Flybe and BMI have all been lost to administration.

Yes, it’s likely that airline shares will bounce back at some point. However, the question is whether they’ll be able to surpass the valuations they had achieved before the pandemic began; and whether some airline stocks will crack under unprecedented levels of financial pressure.

FURTHER READING: Stock market crash 2020: what is going to happen next?

FURTHER READING: Which investments are the best during a recession?

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