Stock market carnage has hit industries across the board. And one of the worst affected is the global aviation industry. Airline operations worldwide have been crippled by the spread of the coronavirus.
As a result, in the UK, shares of International Consolidated Airlines (the owner of British Airways and Iberia), EasyJet, Ryanair Holdings, Wizz Air and TUI, which also operates its own flights, have tumbled. So today I’d like to to discuss what may be in store for these stocks for the rest of the year.
Airlines are in survival mode
A large number of countries have now banned almost all international travel. Domestic travel remains severely restricted too. And most consumers aren’t likely to travel much any time soon unless it’s an emergency. Thus airlines worldwide have been suspending a majority of flights for the foreseeable future.
In addition, several UK airports, including London City, Southend, Gatwick, and Heathrow, are either closed down or offering services at reduced capacity.
As a result, year-to-date (YTD), airline shares have fallen in double-digits:
- International Consolidated Airlines, YTD down 68%, will reduce capacity further by about 90% in April and May
- EasyJet, YTD down 66%, has cancelled all flights
- Ryanair Holdings, YTD down 41%, has grounded all planes
- TUI, YTD down 66%, has suspended vast majority of all travel operations
- Wizz Air, YTD down 44%, routes are being cancelled in alignment with various governmental restrictions imposed
The aviation sector is cyclical. So if we’ve a global recession coming soon, their revenues would likely take another hit. And shareholders may expect even more pain.
Will the UK rescue the industry?
When legendary investor Warren Buffett buys or sells shares, the global investment community pays attention. After all it might also give a strong indication about his views on an industry or the global economy. Last week his firm Berkshire Hathaway sold a substantial number of shares of two member companies of the commercial aviation industry in the US.
Buffett’s decision to sell comes despite the rescue package US President Trump signed into law on 27 March. The country has allocated more than $50bn for US commercial airlines, including $25bn in direct grants.
However, the US aid comes with several strings attached. The stimulus package “would prohibit stock buybacks and share dividends for at least a year after the loans have been repaid. It also restricts executive compensation”.
So far our government has not announced a specific rescue package for the aviation industry. Yet the industry in the UK would also like a government bailout. In late March, chancellor Rishi Sunak suggested that instead of an industry-wide rescue, there could be aid provided on a case-by-case basis.
If a support package is announced in the UK too, then we may potentially expect the government to also impose several restrictions on how an airline may use taxpayers’ money. Such an airline may have to suspend annual dividends, stop share buybacks and cut costs vigorously.
Foolish takeaway
Overall, it’s quite expensive to run an airline. The business is capital-intensive and substantial investment is needed. From purchasing to maintaining planes, management has to plan quarters ahead.
We don’t yet have clarity on the global fight against the virus. Until then investors can expect more turbulence ahead for airlines shares. It may still be too soon to buy them.
