Please ensure Javascript is enabled for purposes of website accessibility

Why Airline Shares Are Down Today

By Lou Whiteman - Feb 27, 2020 at 11:10AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Wall Street analysts are beginning to assess the damage coronavirus has done to the sector.

What happened

Shares of American Airlines Group (AAL 7.09%) fell more than 9% on Thursday morning, and shares of Delta Air Lines (DAL 5.55%) and Southwest Airlines (LUV 4.98%) each fell more than 6%, on continued coronavirus worries. Investors have been concerned for weeks that the virus would impact travel plans, and Wall Street analysts are beginning to try to get a sense of the damage done to the businesses.

So what

Airline stocks are a natural target for a coronavirus-related sell-off, with companies sure to see revenue declines in the first quarter due to cancelled flights. The more recent concern is that the spread of the virus into new regions would stunt global demand, and might weigh heavy on the minds of U.S. consumers as they book summer vacation travel.

On Thursday a number of airline stocks were downgraded by Deutsche Bank and Buckingham due to coronavirus concerns. Deutsche Bank analyst Michael Linenberg said that there is an increasing risk the coronavirus will impact travel patterns in the U.S., affecting peak travel periods including spring break, Easter, and summer. It could also impact business travelers, which tends to be a more lucrative business for airlines.

Airplanes parked at a busy airport.

Image source: Getty Images.

Buckingham analyst Daniel McKenzie said his firm's booking survey found a "near-collapse" of demand to Asia, and worried recent warnings by the Centers for Disease Control and Prevention were likely to impact U.S. travel. McKenzie said he initially had expected airline stocks to fall 10% to 15% further, but the pullback could be stronger and for longer than he had assumed.

American is under particular pressure because the company is seen as the most vulnerable major U.S. carrier to a prolonged slowdown in travel demand. American has the highest debt burden among U.S. airlines, and had intended to use 2020 profits to accelerate debt payments. Shares of American have now lost more than one-third of their value in the last two weeks.

Delta, meanwhile, has substantial exposure to Asia and owns a stake in one of China's top airlines, while Southwest is closely tied to U.S. leisure travel and is likely to feel a pinch if spring break travel is curtailed.

Now what

For the airlines, the question isn't whether the coronavirus will impact operations, it is how much they will impact and for how long. What had initially been seen as a first-quarter issue now appears likely to spread into the second and third quarters as well, and the total revenue hit is not yet quantifiable.

That sort of uncertainty understandably has sparked a sell-off, but for those with a long-term horizon and the stomach to ride through turbulence, the downdraft is likely to create some buying opportunities. Investors should trade carefully and be willing to accept more down days in the near future, but the airline industry is likely to fly through these headwinds eventually.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Southwest Airlines Co. Stock Quote
Southwest Airlines Co.
$37.73 (4.98%) $1.79
Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
$31.20 (5.55%) $1.64
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
$13.90 (7.09%) $0.92

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.