Airline Stocks and the Pandemic
Travel may never be the same
One of the most significant casualties of the coronavirus has been airline travel. Business or leisure, travel advisories imposed to stop the spread of COVID-19 since the beginning of 2020 have caused a complete collapse in demand.
The current U.S. travel ban restricts entry from Europe, the U.K., Brazil, and China; likewise, Americans are barred from entering the European Union. Additionally, continued restrictions within the states have decimated the typically busy summer season. With fleets grounded, air travel has severely stalled.
Based on data from the U.S. Transportation Security Administration, 626,516 passengers were screened at U.S. airports on July 1, compared with over 2.5 million passengers screened on the same weekday one year earlier.
Airlines have cut routes, furloughed employees, and accepted government loans in an attempt to weather the storm. Firms are prohibited from laying off employees until October 1 due to restrictions of the CARES Act, and airlines instead are attempting to reduce headcount with incentives such as early retirement, buyouts, and voluntary leave. And while airline travel has picked up somewhat since March lows, new social restrictions within the United States have stalled travel again, leading airlines to issue new layoff warnings.
Leading up to earnings season, many had expected a bleak picture from the group. As several major airlines reported second-quarter earnings, it became clear how badly the industry was affected.
Prior to COVID-19, four airlines dominated U.S. travel. Based on market share, United Airlines Holdings (NASDAQ:UAL), American Airlines Group (NASDAQ:AAL), Southwest Airlines (NYSE:LUV), and Delta Airlines (NYSE:DAL) controlled over two-thirds of the market from March 2019 through April 2020.
For the second quarter, the four airlines posted massive quarterly losses, and given the current uncertainty, have been reluctant to provide forward guidance. Airline share prices recovered briefly going into the summer on hopes of some holiday travel activity, however, they have dropped again.
Major Airlines — YTD Stock Price Movement
As the travel restrictions imposed due to the pandemic enter their sixth month, airlines are continuing to find ways to cut costs. Already the recipients of billions in funds from the initial stimulus package, the airlines are hoping for more bailout money, and have signed letters of intent with the U.S. Treasury for more funding.
At these prices, are airline stocks a bargain? As a resurgence of coronavirus cases appear in many states, the only near-term hope for a return of business and leisure travel would be a vaccine. Currently, the earliest timeline for a vaccine, and therefore a return to some kind of normal for airlines, is the beginning of 2021.
Alexandre de Juniac, director general and CEO of the International Air Transport Association, an industry group, stated that
“Many airlines are not planning for demand to return to 2019 levels until 2023 or 2024.”
Air travel, as we remember, is unlikely to return. What firms could benefit from this shift?
Once only available to the ultra wealthy, many travelers have been looking to private aviation for their travel needs. The ability to have the plane to yourself, as well as avoiding an airline terminal and a crowded airplane, has helped demand for private jets soar since the onset of the pandemic.
Without actually owning a jet, individuals have several options, including fractional ownership, membership programs, or jet cards, which enable flyers to buy flexible hours. Charter flight bookings are up 90%, according to data from GoGo Business, the inflight entertainment provider.
Many major players in the space are privately held, including Berkshire Hathaway’s NetJets. Wheels Up, also privately owned, announced a partnership with Delta in January, and in March acquired Gama Aviation Signature. Another player is StarJets (OTC: JETR), which has engaged an auditing firm to prepare to uplist. The firm currently boasts of having access to 15,000 aircraft, and booked over $1 million in revenue in the first two weeks of the third quarter.
Fractional ownership and jet cards have made private jet travel more accessible now than in the past, however, private aviation is still out of range for most travelers. What will the future hold for the airline industry? Firms will try to contain cash burn rates, and the least leveraged stocks should be able to weather the storm the best.
Markets are in constant flux, and the only thing certain is continued uncertainty. To learn more, visit quantumeconomics.io. This information is for educational purposes only and should not be construed as trading advice. Past performance is not an indication of future results.
