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Coronavirus Spoils Airlines' Q1 Earnings Story: More Despair Ahead

Maharathi Basu

It is no secret that in the entire investing space, the Airline industry remains one of the worst-affected by the coronavirus pandemic. With several countries on lockdown and wide-spread travel restrictions in place, air-travel demand has been fading out fast.

The fact that the Zacks Airline industry has plunged 51.7% since the beginning of March bears testimony to its tough operating environment.

Passenger Revenues: Airlines’ Stumbling Block This Reporting Cycle

As passenger revenues account for bulk of the top line of airline stocks, negligible air-travel demand spelt doom for the carriers in first-quarter results, which drew to a close for the said space. With the key component of their total revenue bases being significantly drained, heavyweights like Delta Air Lines DAL, Southwest Airlines LUV, American Airlines AAL and United Airlines UAL incurred losses in the March quarter.

The severity of this issue can be gauged from the fact that Delta posted its first quarterly loss since 2010 due to dwindling passenger revenues induced by the deadly COVID-19. Similarly, Southwest Airlines suffered its first quarterly loss in almost a decade with passenger revenues drooping 19% in the first quarter.

Even though the carriers made massive capacity cuts to compensate the demand setback , the poor frequency in air travel during the first quarter caused reduction in another major metric, which  is the load factor (% of seats filled by passengers). Evidently, at JetBlue Airways JBLU, load factor contracted 12.7 percentage points year over year to 69.8% as traffic decline (18.4%) was more than the capacity dip of 3.5%.Similarly, at United Airlines, consolidated load factor deteriorated 10 percentage points to 70.9% as traffic dropped 18.7% while capacity fell to the tune of 7.2%.

The magnitude of the impact of plummeting passenger revenues on the airline stocks’ first-quarter results can be gauged from the fact that even the 66.5% slump in oil prices during the January-March period failed to provide some relief.

More Turbulence Looms on

It is important to note that the coronavirus effect on air-travel demand was significantly felt only in the final month (i.e. March) of the three-month period covered under the first quarter. However, the second-quarter earnings are likely to worsen as air-travel demand will remain suppressed all through its three months. Evidently, Delta anticipates current-quarter revenues to plunge 90% as passenger volumes and revenues continue to tumble. Management stated that the carrier’s first quarter was “unlike any quarter in Delta’s history”. The June quarter is expected to see more adversities. The Zacks Rank #3 (Hold) Latin American carrier Gol Linhas’ GOL revenues for the ongoing quarter are estimated to decline 70% year over year to R$0.9 billion. With the pandemic-related uncertainties still persisting , the company predicts a 70% year-over-year fall in third-quarter revenues as well.

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The bleak outlook for the airlines is further highlighted by the recent development wherein Warren Buffett’s Berkshire Hathaway sold its entire stake in the U.S. airline industry due to the coronavirus impact. “The world has changed for the airlines,” said Warren Buffett, who is considered one of the greatest investors of all times, during Berkshire’s virtual shareholders' meeting.

Despite grounding a sizeable proportion of its fleet due to the evaporating air-travel demand, the airline industry is burning excess of $10 billion cash on a monthly basis. Moreover, the package under the CARES Act will take care of sustaining jobs only through Sep 30, 2020. However, the current tepid air-travel demand scenario is unlikely to touch the pre-coronavirus levels any time soon. Evidently, United Airlines’ CEO Oscar Munoz and president Scott Kirby expect "demand to remain suppressed for months after that, possibly into next year."  In fact, United Airlines authorities warned that up to 30% of its managerial staff may be laid off after Sep 30. Moreover, JetBlue’s CEO Robin Hayes cautioned that "the writing is on the wall", emphasizing that travel demand will not be restored anytime soon.

Come what may, we expect investor focus to remain on this burning issue. To this end, we advise investors to watch this space for further updates.

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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
Gol Linhas Aereas Inteligentes S.A. (GOL) : Free Stock Analysis Report
United Airlines Holdings Inc (UAL) : Free Stock Analysis Report
American Airlines Group Inc. (AAL) : Free Stock Analysis Report
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