Why New Pandemic Headwinds Could Knock Down Airline Stocks -- Barrons.com
DOW JONES & COMPANY, INC. 12:31 PM ET 12/4/2020
Symbol Last Price Change
AAL 16.385up +0.295 (+1.8334%)
LUV 47.6852up -0.1348 (-0.2819%)
SAVE 25.4down +0.87 (+3.5467%)
DAL 42.3328down -0.6172 (-1.437%)
JBLU 15.63up -0.26 (-1.6362%)
QUOTES AS OF 01:05:40 PM ET 12/04/2020
Airline stocks may be flying too close to the sun.
The stocks have soared more than 50% this quarter on hopes that travel will surge as coronavirus vaccines are approved and distributed. But the stocks are now vulnerable to a pullback as Covid-19 cases spike, depressing air travel for the holidays and pressuring bookings for early next year.
Analysts are now lowering estimates, expecting steeper losses over the next few quarters.
"It wouldn't surprise us to see the group pull back 10% to 15% on worsening headlines and a worsening supply/demand dynamic," wrote Seaport Global Securities analyst Daniel McKenzie in a research note on Friday. He maintained a bullish long-term outlook on the sector, but expects the stocks to be choppy over the next few months with 2021 getting off to a rough start.
While airlines have ramped up safety protocols, there is no avoiding the fact that fewer people will fly as new cases and deaths from the virus reach records almost weekly. Vaccines won't be distributed to the general population for months.
Health officials, bracing for a winter surge in the virus, are now urging Americans to mask up and stay home for the holidays as cases continue to climb, reaching more than 200,000 a day. Many states are closing nonessential businesses and urging residents to avoid travel. Quarantine and testing rules are ramping up.
As of Nov. 30, visitors to California were being asked to quarantine for two weeks. Illinois now requires visitors to Chicago who are coming from "red states" with high case numbers to quarantine for 14 days. Several states, including Alaska, Connecticut, Massachusetts, Maine, and New York, are requiring travelers to "test out" of quarantines by certifying that they have tested negative.
The upshot is that airline booking trends are looking dicier. November ticketing volume was down 5% from October, notes McKenzie. December holiday bookings were building, but those revenues may not materialize for airlines since passengers can rebook without penalty on most carriers. Demand for January has "taken a turn for the worse," he notes.
The supply of available seats has been shrinking as airlines cut capacity -- aiming to operate more efficiently and profitably. McKenzie estimates that airlines cut 1 million seats from December schedules and 18 million seats from January in the past two weeks. He estimates that the industry is still oversupplied by 30%.
Some airlines look better positioned than others, depending on their exposure to states with restrictions. Travel to Florida, Texas, and Colorado -- none of which have imposed restrictions on visitors -- is holding up relatively well. That should benefit American Airlines Group(AAL) , Southwest Airlines(LUV) , and Spirit Airlines(SAVE) , says McKenzie.
Nonetheless, Delta Air Lines(DAL) , JetBlue Airways(JBLU) , and Spirit all warned recently that booking trends are slowing and cancellations are rising due to the Covid spike. Delta CEO Ed Bastian told employees on Thursday that the company is seeing "some slowing of demand" and bookings due to Covid. Fourth-quarter revenues will be 30% of 2019 levels. And Delta's daily cash burn rate is going up by $2 million a day, to a range of $12 million to $14 million.
Analysts are now saying the recovery is likely to take longer than they had thought.
Raymond James's Savanthi Syth maintained an Outperform rating on United Airlines Holdings (UAL) on Thursday, for instance. But she increased her estimates for expected operating losses in the first and second quarters of 2021. And she now expects the carrier to lose $2.90 a share next year, a sharp reversal from her prior forecast for a profit of $ 1.25. She maintained a target of $60 for the stock price -- eight times the $7.45 in per-share earnings she expects for 2022.
Shares of United were down about 0.9% to $49.43 in trading Friday.
Write to Daren Fonda at daren.fonda@barrons.com
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