What happened
Shares of major airlines all climbed more than 5% on Tuesday morning after the companies announced sweeping moves designed to cushion the blow of a COVID-19 coronavirus-related travel slump. American Airlines Group (AAL +1.29%) and United Airlines Holdings (UAL 0.12%) led the sector higher, with Delta Air Lines (DAL +0.30%) and Southwest Airlines (LUV 0.19%) also climbing.
So what
Airline stocks have been among the hardest hit during the coronavirus sell-off, with shares of American losing nearly half of their value at their lows. The industry has reported that demand for travel into areas most affected by the outbreak has evaporated, and overall demand is falling rapidly.
United announced plans to cut capacity last week, and Delta and American followed on Tuesday morning by announcing their own cuts to international and domestic flights. The cuts are centered on trans-Pacific routes, but domestic flights will be reduced by 10% or more.
Image source: Getty Images.
Delta, American, United, and Southwest combine to account for about 80% of the domestic market, so the impact on U.S. air travel will be significant. But the cuts should help prevent fare wars as airlines scramble to fill empty seats at any price.
Delta is also instituting a companywide hiring freeze and will park some aircraft, as well as defer about $500 million in planned capital expenditures and delay a $500 million planned voluntary pension funding. American is accelerating cost-cutting.
On Tuesday, United followed up last week's cuts by suspending its share-buyback program, and its CEO and president will both forgo their base salaries during the crisis. All of the major airlines have suspended their first-quarter guidance due to the outbreak, though United admitted on Tuesday it expects to incur a loss in the current quarter. United also successfully raised $2 billion in added liquidity on Monday.
Southwest CEO Gary Kelly is also taking a pay cut during the crisis.
Now what
The market, mindful that past downturns have led to companies including Eastern Airlines, TWA, and Pan Am to disappear from the skies, has been worried about potential bankruptcies due to a prolonged travel slump. The industry has changed, and there was reason to believe all major airlines can weather this storm even before these latest moves, but seeing industry participants take bold actions seems to have reassured investors.
One morning with higher share prices is no reason to take a victory lap. The extent of the impact of the coronavirus on travel and the broader economy is still unknown but is likely to be substantial. While shares are up today, there is real risk that a bad headline in the hours or days to come will send stocks falling further.
For those able to handle the volatility, there is still an opportunity to selectively buy airline stocks at attractive valuations.
