Airline stocks have been battered by the coronavirus, and things might get even worse.
The Arca Airline Index (XAL), which tracks major U.S. and overseas airlines, is down nearly 34 percent since March 2, while the broader S&P 500 is up over 13 percent.
The Arca Airline Index (XAL) compared to the S&P 500 (GSPC) from March 2, 2020 to September 29, 2020. Chart courtesy of Yahoo Finance.
The disparity between the two indexes reflects the challenges that airlines have faced due to the coronavirus. In the beginning of 2020, the XAL was moving practically in lockstep with the S&P 500 in terms of percentage gained, but each index saw a severe drop starting in late February as the pandemic gripped the U.S. economy. But now, even as the S&P 500 has recovered all of its losses, and even set new records, the recovery for airline stocks has been much slower.
The four major U.S. airline stocks have declined as much as a little over 41 percent since March 2. Delta closed at 30.61 on Tuesday, down over 33 percent since March 2, while United finished at 34.51, declining over 41% since March 2.
Citigroup analyst Stephen Trent said that factors affecting airlines included the lack of a vaccine, travel not being back to pre-pandemic levels, and business travel still being terribly impacted.
Another concern for airlines is a looming deadline when many of these companies may start laying off employees. Under the CARES Act, Congress had set aside $25 billion in aid to passenger carriers. However, the terms of the act stipulated that airlines could not lay off or involuntarily furlough staff until October 1.
Now, that date is approaching, and airlines are being faced with tough decisions. Executives have been in Washington to request more aid for the industry. American Airlines has already announced that it will cut 19,000 jobs if more aid is not given, and others may follow.
“A stimulus is kind of good news, bad news, because on one level the stimulus would basically continue to support employment so that we can avoid at least some of it, potentially very ugly, election-year layoffs and probably big layoffs,” said Trent. “The other part of that, unfortunately is, as I mentioned before, demand and supply, there’s currently a lack of equilibrium.
As a result, whatever positives that airlines receive from a stimulus package could be short-lived if demand does not come back.
The lack of demand can be seen in airline passenger numbers. On Saturday, TSA checkpoint travel data showed that passenger throughput numbers were only around 34% of what they were on the same date last year. These numbers are unlikely to pick up anytime soon, as governments worldwide continue to grapple with the virus, with the possibility of new restrictions being implemented as new waves of the virus form.
Even with some flights operating, some passengers are still apprehensive about going to the skies. Airlines are doing what they can to allay fliers’ fears, by requiring masks and blocking middle seats. However, fear is not the only thing keeping passengers from flying.
The pandemic has also given businesses a chance to completely rethink corporate travel, allowing them to realize what activities require in-person meetings, and which ones can be done through video conferencing or other electronic methods. Many of these businesses are seeing the way that they can save money from this lack of corporate travel, and may keep some of their new policies in place even when travel returns to normal. Entering the fall, the dangers to business travel were clear.
“We are only a couple weeks away from moving out of peak leisure summer period and into the more business-heavy fall, and domestic corporate bookings have shown no improvement since mid-June,” analysts said in a Bank of America note, reported by the Dallas Business Journal earlier this month.
Looking ahead, investors may do well to look at airlines more focused on domestic travel, as that is likely the type of travel that most travelers will be doing in the coming months. Low-cost airlines, such as Spirit, may also be good buys, as their lower price may help them attract customers looking to save during this difficult time.