What happened
Shares of TransDigm Group (TDG 1.80%) fell nearly 10%, and shares of Heico (HEI 0.95%) and United Technologies (RTX 0.66%) each fell more than 7%, as the economic impact of the COVID-19 coronavirus outbreak continues to grow.
The ramifications for the airline sector are going to last into the second half of 2020, at least, and lower travel demand will mean less flying and some loss of business for these commercial aerospace suppliers.
So what
Airlines have been the hardest-hit stocks due to the outbreak, and evidence continues to mount that travel demand is cratering as the outbreak spreads. Last week, United Airlines Holdings cut capacity by at least 10% across its network, and JetBlue Airways is also revising capacity downward. Other airlines could follow instead of bearing the expense of flying near-empty planes.
It remains to be seen how long the downturn for the sector lasts. There is some hope that leisure traffic, which is easily stimulated by lower fares, will return as the coronavirus subsides, but if the current economic slowdown leads to a recession, business travel demand could remain low for the foreseeable future.
An aircraft under construction. Image source: Getty Images.
United has already grounded a number of planes due to the slowdown, and airlines looking to conserve cash and weather the storm could defer new plane deliveries from Boeing or Airbus. That in turn would ripple through the supply chain, including TransDigm and Heico, and stunt demand for United Technologies' Pratt & Whitney engines and Rockwell interior systems.
All three companies also get significant revenue from the aftermarket, or spare parts sales, and could see weakness there if airlines cut back on planes used or flying hours and can defer maintenance.
Now what
No one knows how badly the aviation system will be affected by the coronavirus outbreak, or for how long. But there is reason to believe the impact will not be permanent. And these are three great companies with the balance sheets to survive a downturn and capitalize when travel demand eventually does return.
That's not to say the stocks can't or won't fall further. The market hates uncertainty, so until we have a clearer idea of how much the outbreak will spread or how long it will last, it might be hard for the markets to find a bottom. But for those with the ability to ignore the near-term noise and focus on the quality of these businesses, there's no reason to run for the exits even if the sell-off continues.
