Shares of Boeing (NYSE:BA) were down 16% on Monday, and suppliers TransDigm Group (NYSE:TDG) and Heico (NYSE:HEI) were each down more than 10%, after a number of major U.S. airlines announced another round of capacity cuts. Less flying means falling demand for spare parts and new airplanes, which is going to eat into the bottom lines of companies spread across the supply chain.
Airlines have been among the sectors hit hardest by the COVID-19 coronavirus pandemic, with near-term travel demand plunging and consumers avoiding buying tickets for normally busy vacation periods including Easter, spring break, and summer holidays.
Major airlines including Delta Air Lines, United Airlines Holdings, and American Airlines Group have all announced cuts of 40% or more to capacity, extended into the typically busy summer season. Delta alone is likely to ground nearly 300 planes, which will save the airline money, but at the same time mean less business for aerospace parts suppliers.
There is also a growing risk that travel demand will not quickly recover once the virus is contained, especially if the U.S. or global economy falls into a recession. That could freeze demand for new jets, or in a worst-case scenario, lead to a rash of global airline bankruptcies.
Investors got some warning signs a recession was possible over the weekend, with the Federal Reserve on Sunday night slashing the benchmark federal funds rate by 100 basis points, to zero.
Given the extent of cuts already made, it is hard to imagine these companies could escape a material coronavirus impact to current-quarter earnings. And it's getting more likely the weakness will continue well into the second half of 2020. Until we see signs that the pandemic is abating, and travel demand is beginning to return, it will be hard for these stocks to get an upward lift.
Shares of Boeing are now down 56% year to date, and shares of TransDigm and Heico are down more than 33% apiece. Boeing is plagued by uncertainty throughout its portfolio, and despite the decline I would not recommend buying in right now. But TransDigm and Heico are two of the top-performing aerospace companies over the past five years, and TransDigm in particular has been the first stock I'd recommend to anyone interested in investing in aerospace.
Nothing about the long-term optimistic outlook for TransDigm and Heico has changed, and I'm holding onto my TransDigm stock. The next few months will likely bring further turbulence, but these companies are well-positioned to survive a downturn and thrive on the other side of it.