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Airline ETF & Stocks at Risk as Coronavirus Hits Air Travel

Sweta Jaiswal, FRM

The coronavirus outbreak is getting severe by the day. The impact of the outbreak can be seen on economic health, with the airline sector being one of the worst-hit spaces. The S&P 500 Airlines Industry Index has lost 42.5% in the year-to-date period in comparison to S&P 500’s 26.1% fall.

The virus’ spread has resulted in declining air travel plans and travel restrictions imposed by the government. Moreover, the rising coronavirus cases in the United States, South Korea, Italy, Iran and Spain are a major concern now. In order to contain the spread of the virus, last week President Trump announced a 30-day ban on travel to the United States from 26 European countries which expanded subsequently to include the U.K. and Ireland. However, Trump is willing to provide support to the airline industry that needs around $58 billion in aid to combat the impact of the outbreak (read: ETFs to the Rescue as Coronavirus Wreaks Havoc).

Coronavirus’ Attack on Airlines

Since the eruption, there has been an around 25% decline in airline stocks, per an International Air Transport Association (“IATA”) report. According to Alexandre de Juniac, director general and CEO of the IATA, passenger traffic growth across the world in January 2020 was the slowest in a decade. Signaling at the lowest monthly increase since April 2010, demand (measured in total revenue passenger kilometers or RPKs) rose only 2.4% in the month on a year-over-year basis.

Moreover, IATA believes that the outbreak can result in losses of around $63-$113 billion in global airline revenues in 2020. The outlook compares unfavorably with the previous estimate of a $29.3-billion passenger revenue loss. However, previously, the industry trade group had assumed that the coronavirus-led low demand would impact mostly the Chinese market (read: 11-Year Bull Market Nears an End? ETFs That Should Survive).

Measure Taken by Airlines

United Airlines Holdings UAL, JetBlue Airways Corporation JBLU, American Airlines Group Inc. AAL and Delta Air Lines DAL have been observed to announce cuts to their international and domestic schedules, largely due to waning demand.

American Airlines is planning to trim international flying by 75% and domestic by around 30%. Going on, United Airlines Holdings will lower capacity by 50% in April and May and Delta Air Lines is aiming to cut capacity by 40%, its biggest ever. Southwest Airlines Co. LUV will trim at least 20% of its flight capacity. These major players are also lowering expenditure by parking planes, holding off hiring and offering voluntary absent leaves. These major carriers are also seeking to gather billions of dollars in new financing. For instance, led by agent JPMorgan Chase & Co., Delta is negotiating with banks to raise between $2 billion and $4 billion with a 364-day secured term-loan facility.

Against this backdrop, investors can look at the following airline ETF that might be at risk:

U.S. Global Jets ETF JETS — down 48.5% year to date

The fund provides investors access to the global airline industry, including airline operators and manufacturers from all over the world. With an AUM of $71 million, the fund holds a basket of 34 stocks. It trades in average volumes of about 132,000 shares a day. It also has an expense ratio of 60 basis points. The fund carries a Zacks Rank of 3 (Hold) with a High risk outlook (read: Coronavirus Fuels Madness in These Sector ETFs & Stocks).

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Southwest Airlines Co. (LUV) : Free Stock Analysis Report
JetBlue Airways Corporation (JBLU) : Free Stock Analysis Report
Delta Air Lines, Inc. (DAL) : Free Stock Analysis Report
United Airlines Holdings Inc (UAL) : Free Stock Analysis Report
American Airlines Group Inc. (AAL) : Free Stock Analysis Report
U.S. Global Jets ETF (JETS): ETF Research Reports
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