Airlines Reported Income After COVID-19 Shut Down: Should We Buy Stocks?
8 minutes for reading
The coronavirus COVID-19 pandemic struck the tourist industry most severely; the tourist industry, in its turn, pulled down airlines. Stocks of the world's largest airlines fell to a minimum costs and the companies started filing for bankruptcy. Passenger flow shrunk by over 80%; nowadays, airlines struggle to fill their airplanes with passengers and survive the crisis.
Airlines stock price growth
In May, when investors were optimistic and ready for risks, the price of many stocks in the stock market started to grow, and the S&P 500 index approached its all-time highs. The stocks of airlines grew alongside others, however, there was no real reason for buying them.
Recommendations to sell stocks of airlines
In April, I warned you that stocks of airlines were suitable for sales only. 👇
In May, I foresaw several bankruptcies. 👇
However, that month, things went differently: airlines got financial support from the government, and the worst seemed to have passed.
In fact, the government just poured money over the problem instead of solving it. The coronavirus keeps spreading, flights are lacking passengers, while the price of tickets started to grow. Moreover, the oil price has also increased, so the price of fuel for airplanes grew, which puts more financial load on airlines and decreases the profitability of flights. Anyway, this is just the overall picture. Now let us have a look at several largest companies in the USA and their financial results.
United Airlines Holdings, Inc. stock forecast: no serious improvements
On July 21st, the company presented a report on the financial results of the second quarter of 2020. The management said that it was the hardest quarter in the whole 94-year of the company’s history.
- The losses of United Airlines (NASDAQ: UAL) reached 1.627 billion USD while the income shrunk by 70% - from 11.4 billion USD in Q2, 2019 to 1.48 billion in the previous quarter.
- The profit per passenger amounted to 681 USD – against 10,486 USD in Q2, 2019.
- The number of passengers decreased from 42,592 in Q2, 2019 to 2,813 in Q2, 2020.
- As long as there are no conferences, and most employees work from their homes, corporate traffic also fell by 94%.
As you see, there are drawdowns in all respects; obviously, other airlines also suffer from a decrease in the passenger flow that affects their profit negatively.
The report did not make the stock price drop abruptly because the results had been expected.
On June 5th, the stock price reached a high of 48.95 USD and since then, it has dropped by 35%. The decline reflected the expectations of the deterioration of the company’s affairs – regardless of the investors’ optimism in May that pushed the stock price upwards.
The forecast for the next period that the head of the company gave has almost no serious improvements. Hence, the United Airlines stocks may drop even deeper down.
The nearest support is at 20 USD, and the stock price is likely to drop there.
American Airlines Group Inc. stock forecast: negative perspectives for the next quarter
On July 23rd, American Airlines (NASDAQ: AAL) published its financial result of the second quarter of 2020. Strange though it may seem, director-general of the company Doug Parker also stated that Q2 was one of the hardest financial quarters in US history. The loss of the company reached 2.1 billion USD.
The income shrank by over 86%: to 1.6 billion USD from almost 12 billion USD last year. The company managed to decrease its losses from 100 million USD a day to 30 million USD a day by decreasing the number of flights, preliminary retirement or voluntarily vacations of the employees.
Several airplanes also “retired”: 20 Embraers, 34 Boeings 757, 17 Boeings 767, and 9 Airbuses A330-300, alongside with some older regional planes. Some types of planes were included in the program of temporary storage. All in all, 150 planes were excluded from flights. The company’s commitments have exceeded its assets by 3.16 billion USD already.
All this means that the company’s current task is to remain afloat – no chance for any growth of the income or making profits.
On June 5th, the stock price of American Airlines, alongside that of United Airlines, reached its peak at 22.80 USD. Since then, the price has fallen by more than 50%.
Market participants expected the company’s results to be bad, so the publication of the report never pulled the American Airlines stock price down. Nonetheless, the price may go on falling because the company’s management has made a negative forecast for the next quarter, pointing at the low intensity of passenger flow and the situation remaining unpredictable – on the whole, the vaccine is our only hope.
As long as the stock price is already so low, the low at 8.25 USD may only happen in the case of bankruptcy of the company. Otherwise, the stocks will trade at 10-15 USD each.
Delta Air Lines Inc. stock forecast: good liquidity to remain the Company afloat
The loss of Delta Air Lines, Inc. (NYSE: DAL) was perhaps the largest in the second quarter, 2020. According to the financial report, the company lost 5.7 billion USD. Their income fell from 12.5 billion USD in Q2, 2019 to 1.47 billion USD in Q2, 2020, or by almost 90%.
However, do not be scared of this data. Currently, this company looks the strongest among its rivals.
2.1 billion USD of the whole sum of the loss is due to investing in LATAM Airlines, Aeromexico, and Virgin Atlantic. The first two airlines announced bankruptcies while the third one – non-judicial debt readjustment.
In April, Delta used to spend about 100 million USD daily; by now, it has managed to reduce its expenses to 27million USD a day. The company ended the second quarter with 15.7 billion USD in cash and short-term investments.
Even if this sum does not increase in the nearest future, with such a level of expenses, the company will end the year 2020 with no less than 10 billion USD. Having such an amount of cash and investments, the company will easily attract investments; moreover, the assets of Delta exceed its commitments by almost 10 billion USD.
On the day when the report was published, the company’s stock price dropped by 5%but the next day, they restored and traded 11% higher than yesterday’s low.
Even though the company features substantial liquidity for remaining in the market, I would not count on a long-term trend. The company’s goal is to remain afloat until people start getting vaccinated.
Downsizing is coming
Airlines have already reduced their expenses but I think in October, they will cut down on them again. One expense item is the salary of employees. In May. Airlines got help from the government, and one of the conditions was to maintain jobs until September 30th.
Currently, airlines are reducing the employees’ salaries and give them paid holidays until September 30th. However, when October comes, we must expect massive sacking.
For example, United Airlines suggested that more than 36,000 employees should go on voluntarily vacations, and American Airlines warns of the possible sacking of 24,000 employees.
Obviously, there is a struggle for survival. Now imagine what is going to happen. A company has reduced the number of airplanes and employees – how might it make the same profit again? This is literally impossible. In other words, we are not expecting the stock price of the airlines to return to the pre-crisis level.
Summary
Warren Buffett has sold all the stocks of airplanes he owned, and he is a long-term investor. I suppose, if he saw any perspectives in the sector in the nearest future, he would not have done this.
All that airlines are doing now is reducing expenses; they are all losing already, and there is no hope for development.
After the terror act of 2001 and the crisis of 2008, the flow of passengers took several years to restore. The current situation is much graver. Working from home, conferences online – all this leads to a reduction of corporate flights that used to take 50% of traffic.
No chance for dividends as well- no one hopes for any profit. All we have to wait for is the news about the vaccine. If some drug does appear, and the population starts getting vaccinated, countries will take off all limitations of flights, and this period will become attractive for investors.
You may start investing now but the risk is high. The stocks of airlines are at their lows, and a small decline may follow. However, the question is not at what price to buy but which company will not go bankrupt.
In this case, it will be wise to choose a company with the smallest debt and the largest amount of cash at hand. I presume, the optimal choice for investments will be Delta Air Lines. This investment must be planned as a long-term one, taking no less than a year. Keep in mind that the risk is high.
