Will the US Airline sector navigate the winds of uncertainty?

Author: Aditya Raghunath

Estimated read time: 4 minutes

Publication date: 12th Aug 2020 11:39 GMT+1

It is known by all that one industry that has been most impacted by the COVID-19 pandemic is the aviation sector. Border closure and restrictions on travel has completely grounded the US aviation industry.

Prior to the coronavirus crisis, the US Airline sector had witnessed its best phase. But now, the sector has been abuzz with talks of capacity reduction, employee furloughs, grounded aircrafts, and numerous discussions on government aid. The struggle is real and as the instances of cases increase, each passing day gets worse for the US airline industry.

A piece in CNBC indicated, “It’s not just would-be vacationers who are staying home. Also absent are high-spending corporate travelers, a crucial customer base for network carriers, as companies suspend business trips because of the virus.” The Washin gton Post cited the International Air Transport Association’s June forecast according to which carriers would lose $84.3 billion in 2020 globally.


An ailing airlines sector could lead to a weaker economy

The $50 billion aid by the Congress announced in March came as a huge saving grace for the battered U.S. Airlines. The package included $25 billion as loans and grants for paying nearly 750,000 workers of the airlines sector so that there aren’t major pay cuts or furloughs through September 30.

However, if the demand continues to be low, this aid won’t be enough for the airlines to fly through this crisis. Also, if Congress doesn’t extend this support beyond October 1, we can see huge job losses in the aviation sector and it would have a cascading impact on the economy.

According to IATA, loss of employment in related industries including aircraft manufacturers, engine makers, airports and travel agencies could swell to 25 million worldwide.

It is thus evident that the US economy would also not be immune from this impact. In July, the United Airlines (NASDAQ: UAL) has already announced to its employees that it might have to let go about 36,000 out of the total 95,000 staff across the globe. The hotels and lodging sector in the U.S. see 7.5 jobs lost for each one in aviation.


Recent data shows a sudden spurt in passengers at the airports

Things have however started to look up. Data showed air travel at its highest volume in nearly five months amid growing political support for extended financial aid. The number of people screened at the Transportation Security Administration checkpoints at US airports were 831,789 on Sunday alone.

This is the second consecutive weekly rise and was the highest since March 17. Airline stocks rejoiced on the news with Southwest Airlines (NYSE: LUV), American Airlines (NASDAQ: AAL), Delta Airlines (NYSE: DAL) and United Airlines gaining between 5% and 9%, each.  It shows summer travellers are willing to brave the COVID-19 situation and step out.


Investors must exercise extreme caution amid growing uncertainty

However, it is noteworthy that the TSA traffic was 70% lower than what it was in the same period last year. Which means that there is still a long way to go for the US airline sector. Investors must take an extremely cautious approach while investing in airline stocks.

The data emerging now may be indications of an early stage of a very slow recovery in the offing. This is just a day’s figures and one must avoid reading too much into it.

The US Airline sector has been able to dodge large scale layoffs thanks to the Congress aid, however, post this, the road to recovery is rocky. Most of the airline stocks have lost between 40% to 50% year-to-date and leading carriers like United and Delta posted their first quarterly loss in over five years. Comparatively, the S&P 500 and NASDAQ are trading near record highs.

There is lot of uncertainty as to how the industry will face this crisis, hence most of the companies have armed themselves with additional equity and debt financing. We have our eyes on further developments in the aviation sector and the government’s stance on this ailing industry.

Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.