Industry Spotlight

Airline stocks: What’s happening in the embattled sector?

Airline stocks, much like their fleets, have been grounded recently. As governments around the world continue to restrict air travel, the stocks embattled stocks have been dropping.

The scale of the headwinds that the aviation industry is facing became apparent when British airline Flybe went into administration in early March. While the airline had already been on the brink of collapse prior to March, it was the coronavirus that pushed it over the edge. Two more regional airlines have filed for bankruptcy in the US since then: Compass Airlines and Trans States Airlines.

The ARCA Airline Index [XAL] — which has holdings in most major US airlines such as American Airlines [AAL], Delta Air Lines [DAL], JetBlue [JBLU] and Southwest Airlines [LUV] — has plummeted 56.9% since the start of January through 15 April.

In Europe, the Stoxx Europe Total Market Airlines index has taken a similar tumble, falling 51.1% in the same period of time, as its constituents — including Ryanair [RYA], International Consolidated Airlines Group [IAG] and EasyJet [EZJ] — work to build up their cash reserves.

56.9%

Price fall of the ARCA Airline Index from start of January to April 15

  

Airlines on the continent take defiant stance

In an announcement that helped battered travel stocks recover somewhat, executives at two of Europe’s biggest budget airline carriers said they are taking measure to steel themselves from further hardship.

In a trading update on Thursday (16 April), EasyJet announced that it had launched a massive cost-cutting initiative in an effort to free up cash reserves.

As well as cancelling a number of projects, the British airline reported that it would defer the purchasing of 24 new aircrafts, which is set to help decrease capital expenditure by £1bn over the next three years. Shares in EasyJet rose after, it also confirmed that it had borrowed £400m against its aircraft fleet.        

“These decisive actions mean that easyJet is well-positioned to endure a prolonged grounding,” CEO Johan Lundgren said in a statement. “We remain focused on doing what is right for the company for its long-term health and to ensure we are in a good position to resume flying when the pandemic is over.”

“We remain focused on doing what is right for the company for its long-term health and to ensure we are in a good position to resume flying when the pandemic is over” - EasyJet CEO Johan Lundgren

 

Ryanair chief executive Michael O’Leary told Reuters a day before that he had expected to win the oncoming airline price war once travel restrictions are lifted. O’Leary predicted a swift traffic rebound and believes his airline is in a good position to keep up with the “massive price-dumping” to come.

 

Airlines call for financial aid

In March, as the coronavirus pandemic deepened airline bosses including Lundgren and Lufthansa’s Carsten Spohr had called on governments around the world to provide state aid to survive the dramatic plunge in demand.

The response has been mixed. The European Commission approved two aid packages in the past week for airlines in Sweden to receive €455m as well as Scandinavian airline SAS, which was approved for €137m.

Governments in France and Norway are also reportedly preparing aid packages for their regional airlines. However, the UK government has yet to announce any support for the sector, despite calls from industry bodies.

Stateside, the US Treasury Department’s secretary Steven Mnuchin announced a $25bn rescue package for 10 of the country’s biggest airlines on Wednesday (15 April), including American Airlines, Delta and Southwest.

$25million

Valuation of rescue package for 10 biggest US airlines

  

The news sent shares across the industry higher with American Airlines and United Airlines [UAL] stock prices rising 2.8% and 3.1% respectively on Wednesday.

 

On the horizon

The federal support package will act as a buffer for airlines to shield themselves from the worst of the economic fallout, notes Steve Chiavarone, portfolio manager at Federated Hermes. “I think that the strong rally that you’ve seen has reflected that. You’ve taken the tail-risk off,” he told CNBC.

However, Bill Baruch, president of Blue Line Capital, doesn’t believe the sector will perform over the next few months to a year, as passenger travel is down 90% across the country.

“If you were to try and find a name, I think Southwest would fit the bill for this scenario,” Baruch told CNBC. Although the airline is down 38% since the start of January through to 15 April, Southwest has performed much better than its peers.

While the stock currently trades at the $32 mark, Baruch believes that if it can reach $38. “Its path of least resistance in the near term” could be a move up to $44.

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