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Coronavirus Spoils Airlines' Q2 Earnings Story: What Lies Ahead?

Maharathi Basu

It is a well-known fact that the Airline industry has been one of the worst-affected corners in the investing space due to the coronavirus pandemic that diminished passenger revenues. The recently announced airline results for the June quarter bear testimony to the struggles of the industry participants. In fact, the coronavirus impact was more severe on the second quarter than on the March-quarter as the entire three-month period (April to June) bore the brunt of this meltdown in air-travel demand as opposed to only a single month (March) in the last reported quarter.

Let’s recapitulate the results of key airline stocks in the June quarter.

Delta Air Lines DAL kicked off the second-quarter 2020 earnings season for the aviation industry on Jul 14. This Atlanta-based carrier suffered a wider-than-expected loss in the June quarter. Notably, passenger revenues slumped 94% year over year in the period to $678 million with enplaned passengers plummeting 93% due to low demand for air travel. With Delta making significant capacity cuts to compensate for the coronavirus-induced sharp decrease in traffic, capacity (measured in available seat miles) contracted 85%. However, the traffic decline (94%) was greater, deflating the load factor (percentage of seats filled by passengers) immensely to touch 34%, marking a steep plunge from 88% a year ago.

Chicago-based United Airlines UAL fared no better, having reported wider-than-expected loss as well. Moreover, operating revenues slumped 87.1% year over year due to the 93.5% drop in passenger revenues. Further, consolidated load factor deteriorated 5290 percentage points to 33.1% as traffic decline was more than capacity contraction.

Additionally, Dallas-based Southwest Airlines LUV was a victim of lackluster passenger revenues (down 87.2%) as it too reported a wider-than-estimated loss. Load factor came in at 31.4%, down 5500 basis points on a year-over-year basis. Passenger revenue per available seat mile (PRASM: a key measure of unit revenues) nosedived 71.3% to 3.94 cents. The story of another airline heavyweight American Airlines AAL was not dissimilar as it also posted a loss (excluding $3 from non-recurring items) of $7.82 per share, comparing unfavorably with the Zacks Consensus Estimate of a loss of $6.75.

Like the other three airline majors, the massive 89.9% fall in passenger revenues was responsible for the sorry state of affairs at this currently Zacks Rank #3 (Hold) carrier. While consolidated traffic plummeted 88.5%, capacity contracted 76.4%. Consolidated load factor decreased 44.3 percentage points to 42.3%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other carriers like JetBlue Airways JBLU, Alaska Air Group ALK and Spirit Airlines SAVE too fared miserably in the June quarter due to shrinking passenger revenues.

Despite the overall gloomy scenario, low fuel prices provided some relief. Moreover, with most of the fleet remaining grounded/under-utilized, fuel gallons consumed also decreased to lower the commodity’s expenditure, thus aiding the bottom line in turn. Additionally, the focus of most airlines on operating cargo-only flights in the face of drained passenger revenues is praiseworthy. Evidently, cargo revenues surged 36.3% year over year at United Airlines in the June quarter.

Any Relief in Sight?

The million-dollar question after such a disappointing performance is whether the airline stocks can turn things around in their favor. The answer is unfortunately an emphatic no, at least in the remainder of the year. The spike in coronavirus cases in some parts of the United States negated the improvement in air-travel demand witnessed since late May. For example, Southwest Airlines expects operating revenues for August to decline 70-80% year over year as bookings decreased while trip cancellations increased.

Moreover, the financial aid under the CARES act protects jobs at the airlines only through Sep 30, 2020. However, per a Reuters report, airlines are seeking a six-month extension of the payroll support program as the desired rebound in air travel is no way a near-term possibility. In fact, many airlines already warned of job cuts post the above date as they are faced with the problem of overstaffing due to depressed revenues. Per a CNBC report, United Airlines warned that it may have to furlough more pilots than the original plan of 2,250.

In a bid to stay afloat during this unprecedented crisis, many leading carriers signed letters of intent pertaining to their share of the $25-billion federal loan under the CARES Act. Although the signing of the letters of intent does not mean that airlines are obligated to borrow loans, we expect them to avail of the same to bolster their liquidity position.

In view of this grim situation, we don’t expect the aviation stocks to be out of the woods anytime soon.

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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
 
Alaska Air Group, Inc. (ALK) : Free Stock Analysis Report
 
Spirit Airlines, Inc. (SAVE) : Free Stock Analysis Report
 
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