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Airline : Still Not Flying

(Thu, 9 July 2020). Three key factors could push airlines down: weak financials, a second wave of the pandemic, and high daily operational costs.

Airline firms are scrambling to lower daily operating costs to survive the pandemic. The number of infections is continuously increasing, fueling the uncertainty around the tourism market. The Dow Jones U.S. Airlines Index (INDEXDJX: DJUSAR) dropped by 27.7% in 1 month. Airlines cannot catch a break. United Airlines might furlough 36,000 employees, AirAsia shares were suspended, and American Airlines could have 20,000 employees in excess.

Airline stocks are barely showing signs of recovery after a steep fall since early June. Three key factors could push airline companies down despite a booming stock market. The main factors are weak financials, a second wave of the pandemic, and high daily operational costs.

 

Spiralling Costs

Airlines have big overhead costs because of long-term aircraft leases. In April, United Airlines (NASDAQ: UAL) and Delta Air Lines (NYSE: DAL) reported $70 million and $50 million in daily losses, respectively. Major U.S. airline giants secured multi-billion dollar loans, liquidity, and capital in the first quarter of 2020. Delta, for instance, secured $5.4 billion in capital in April to sustain its expenses.

If Delta burns through $50 million a day, $5.4 billion covers just 108 days of operating costs. Delta secured another $10 billion in liquidity, but many other companies do not have that luxury. AirAsia, as an example, had their shares suspended after Ernst & Young notified Malaysia’s stock exchange about the firm’s financials.

 

Weak Financials

Companies are consistently exploring mass layoffs of employees. For now, decreasing cash burn by furloughing employees is seemingly keeping airline stocks afloat. Still, the concerning financials of many firms are preventing airline stocks from recovering in tandem with the U.S. stock market. The Dow Jones U.S. Airlines Index fell from 180.65 to 130.54 since June 8, by 27.7% in 31 days.

 

A Worsening Pandemic

As of July 9, the number of virus infections globally surpassed 12 million. The World Health Organization (WHO) acknowledged that there is newly-emerging evidence that shows the airborne transmission of the virus. The rapid expansion of the pandemic, after nearly five months of restrictive measures and lockdowns, poses a gloomy outlook for airlines. Even if some countries begin to open up flight routes, companies could be pressured to limit their capacity.

Firms also face the risk of declining demand for traveling, in general, as uncertainty around the pandemic intensifies. On June 15, London’s Gatwick Airport CEO Stewart Wingate warned that airports might not see 2019 passenger levels for four more years. Airline stocks are sustaining their momentum through regular cost cuts. In the long-term, a consistent decline in passenger levels present a critical threat against the entire industry.

 

 

 
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