Coronavirus has sent airline shares tumbling. Is now a good time to buy in?
By Lou Whiteman
(TMFeldoubleu)
Mar 8, 2020 at 8:00AM
Airline shares have been decimated by the COVID-19 coronavirus sell-off, with some stocks losing nearly half of their value in the last two weeks alone. And not without reason.
As the coronavirus has spread globally, travel demand has plummeted, with United Airlines Holdings (NASDAQ:UAL) saying it saw near-term demand to all of Asia fall by more than 75% when the virus was largely contained to China. The airlines have canceled flights to parts of the world that have been heavily affected, and some, including United and JetBlue Airways (NASDAQ:JBLU), have announced plans to scale back service across their entire networks until demand resumes.
The airline sector has long been highly cyclical, and the downturns have usually been painful for investors. Storied names like Eastern Airlines, TWA, Braniff, and PanAm disappeared from the skies during past downturns.
Nothing is certain about the ultimate effects coronavirus will have on the economy at large, and airlines in particular, but it does appear the blow will be substantial. It's a scary time to be holding airline shares. But for those with a long time horizon, and the stomach to handle turbulence, here's why it's a great time to buy.
insert-text-here
Wall Street tends to be focused on quarterly results, and there is little doubt the coronavirus will affect airline financials at least for the first half of 2020. That could extend into the second half of the year as well. During a TV appearance, Southwest Airlines (NYSE:LUV) CEO Gary Kelly said the drop in demand is reminiscent of what happened after the attacks on Sept. 11, 2001.
In years past that might have been enough to permanently ground a U.S. airline, and based on the stock reactions in recent weeks, memories of past crises are weighing heavily on investors this time around. However, the industry has changed dramatically.
A period of restructuring and consolidation in the early 2000s reduced the number of airlines competing for business and fortified the balance sheets of the survivors. Today Delta Air Lines (NYSE:DAL), American Airlines Group (NASDAQ:AAL), United, and Southwest control about 80% of the U.S. market, giving them unprecedented pricing power.
The coronavirus could cause changes in behavior, for example, boosting teleconferencing over business travel. There is also the risk the virus-related slowdown could lead to a U.S. recession that could soften corporate travel demand. But there is nothing to suggest there will not be an eventual recovery. If past virus outbreaks are a guide, tourism and leisure travel will return first, possibly as soon as this summer, because it is more easily stimulated by fare sales.
Prior to coronavirus, the International Air Transport Association had projected that global air traffic will double over the next two decades. Near-term earnings are likely to tumble because of the outbreak, but in all likelihood the long-term growth forecast will not be altered. And fortunately for investors, all major airlines have the balance sheets to weather a near-term disruption.
Airlines are healthier than they have ever been
In past downturns airlines failed because the industry has massive fixed costs tied to airplane purchases, and with so many competitors chasing a limited number of fliers, pricing discipline went out the window. Consolidation has helped on the pricing side, and the post-9/11 bankruptcies of Delta, American, and United have helped bring costs under control as well.
American's share price fall has been the most dramatic among major airlines because the company has $24 billion in long-term debt, the most in the industry, and is therefore seen as the most vulnerable to a prolonged downturn. The company went into 2020 hoping to use profits to pay down that debt total by as much as $4 billion over the next two years, and coronavirus has certainly cast doubt on that plan.
But American and its peers are far from a cash crunch. The company successfully raised more than $1 billion earlier in the year and has significant unencumbered assets to borrow against if it needs more cash in a pinch. At year's end, it also had about $7.1 billion in total available liquidity under its borrowing agreements.
Spirit Airlines (NYSE:SAVE) has fallen nearly as much as American, which is perhaps unsurprising given that the company's 31% debt to asset ratio is the only U.S. airline approaching American's 40% figure. The company's shares have also been beaten down because it was expected to be one of the fastest-growing airlines in 2020, and its valuation prior to the outbreak reflected an outlook for growth that now seems unlikely to materialize. But Spirit, like American, is not cash constrained, with more than $1 billion in cash at year's end.
The industry also has the support of Washington, with the White House reportedly willing to consider deferring taxes to help stem the economic fallout of the slowdown. The bottom line is that every publicly traded U.S. airline has considerable runway ahead of it before the coronavirus becomes a severe financial crisis.
Warren Buffett, who famously said investors should be greedy when others are fearful, manages a basket of airline stocks inside Berkshire Hathaway. We won't know for sure what Buffett was buying and selling as markets turned south until quarter-end disclosures, but we do know Berkshire added to its massive Delta stake in late February.
Buy for the long haul
Investors looking at the airline sector need to understand this could get worse before it gets better. The global industry has lost more than $40 billion in combined market capitalization in February alone, about one-fifth of its total, according to British investment firm AJ Bell. That sort of drop is driven by emotion, and not financials, and until the full extent of the coronavirus is known it could be hard for airline stocks to find a bottom.
That said, the long-term outlook for the industry is not 20% worse today than it was in early January. Investors willing to buy in today and ride through the headwinds have the opportunity to buy quality operators like Delta at six times earnings, less than half the multiple investors were paying for the stock a little more than a year ago.
Be careful bargain hunting: Companies like American and Spirit have fallen the most because their upside is delayed more than most due to coronavirus and could be facing multi-year recoveries. But for those who can ignore the headlines, keep a focus on the long term, and be selective about what they buy, it is an intriguing time to buy airline stocks.
Recent DAL News
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 06/17/2024 08:45:49 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 06/13/2024 08:30:21 PM
- GME Volatile as Roaring Kitty Goes Live Today, Meta Unveils AI for WhatsApp Ads, and More • IH Market News • 06/07/2024 12:09:15 PM
- Form 13F-HR - Quarterly report filed by institutional managers, Holdings • Edgar (US Regulatory) • 05/10/2024 08:30:09 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 05/09/2024 08:30:31 PM
- Form 144 - Report of proposed sale of securities • Edgar (US Regulatory) • 05/08/2024 06:45:39 PM
- Form PX14A6G - Notice of exempt solicitation submitted by non-management • Edgar (US Regulatory) • 05/06/2024 10:01:06 AM
- Philips Stocks Soar 47% Following US Deal, Tesla Bolsters Presence in China, and More News • IH Market News • 04/29/2024 11:11:24 AM
- Delta Board of Directors Welcomes Maria Black and Willie Chiang as Newest Members • PR Newswire (US) • 04/26/2024 08:45:00 PM
- Delta Air Lines Declares Quarterly Dividend • PR Newswire (US) • 04/25/2024 08:30:00 PM
- American Express and Delta Air Lines® Bring Back Popular Airplane Metal Card Design • Business Wire • 04/25/2024 12:00:00 PM
- Paramount’s Shares Surge Following Sony and Apollo’s Joint Bid; ISS Backs Berkshire Hathaway Director Re-election, and More • IH Market News • 04/19/2024 11:31:22 AM
- Delta Air Lines Selects T-Mobile as Preferred Mobility Partner • Business Wire • 04/18/2024 02:06:00 PM
- SriLankan Airlines Leverages UATP Merchant Status to Accelerate Growth and Reduce Payment Costs • PR Newswire (US) • 04/10/2024 12:00:00 PM
- Delta’s Q1 revenue at $13.7 billion, up 8% • IH Market News • 04/10/2024 11:47:42 AM
- U.S. Index Futures Show Mixed Trend Ahead of Key Inflation Data Release, Oil Prices Edge Higher • IH Market News • 04/10/2024 11:15:25 AM
- Delta Generates US$37 Million Profit in Q1, Google and Intel Unveil Cutting-Edge AI Chips, and More News • IH Market News • 04/10/2024 11:13:48 AM
- Delta Air Lines Announces March Quarter 2024 Financial Results • PR Newswire (US) • 04/10/2024 10:30:00 AM
- U.S. Futures Dip Ahead of Key Inflation Data and Q1 Earnings Season Kickoff, Oil Prices Decline • IH Market News • 04/08/2024 11:19:03 AM
- Delta Air Lines Announces Webcast of March Quarter 2024 Financial Results • PR Newswire (US) • 03/27/2024 12:30:00 PM
- Apple & Google in Talks for Gemini AI on iPhone, Nvidia’s GTC Conference Today, and Latest News • IH Market News • 03/18/2024 11:10:46 AM
- Fisker’s Shares Take a Hit Amid Speculation of Bankruptcy, Altria Divests from AB InBev to Fund Stock Repurchase Initiative • IH Market News • 03/14/2024 11:39:32 AM
- Intel Loses Pentagon Funding, Shell Plans 20% Business Team Reduction, and Latest News • IH Market News • 03/13/2024 11:02:03 AM
- Sam Altman Rejoins OpenAI Board; Coinbase, MicroStrategy Surge Pre-Market Amidst Bitcoin’s Latest Milestone • IH Market News • 03/11/2024 10:39:03 AM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 02/29/2024 09:01:15 PM
Last Shot Hydration Drink Announced as Official Sponsor of Red River Athletic Conference • EQLB • Jun 20, 2024 2:38 PM
ATWEC Announces Major Acquisition and Lays Out Strategic Growth Plans • ATWT • Jun 20, 2024 7:09 AM
North Bay Resources Announces Composite Assays of 0.53 and 0.44 Troy Ounces per Ton Gold in Trenches B + C at Fran Gold, British Columbia • NBRI • Jun 18, 2024 9:18 AM
VAYK Assembling New Management Team for $64 Billion Domestic Market • VAYK • Jun 18, 2024 9:00 AM
Fifty 1 Labs, Inc Announces Acquisition of Drago Knives, LLC • CAFI • Jun 18, 2024 8:45 AM
Hydromer Announces Attainment of ISO 13485 Certification • HYDI • Jun 17, 2024 9:22 AM