Please ensure Javascript is enabled for purposes of website accessibility

Why Shares of Major Airlines Lost Altitude in March

By Lou Whiteman – Apr 2, 2020 at 6:05AM

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

The industry was dealt a devastating blow by the pandemic.

What happened

Airline stocks have been hit hard by the COVID-19 coronavirus pandemic, which has caused travel demand to plummet and has led to concerns about the industry's ability to navigate through the crisis. Shares of United Airlines Holdings (UAL -4.01%) lost 48.8% in March, according to data provided by S&P Global Market Intelligence, and shares of Delta Air Lines (DAL -3.14%) and American Airlines Group (AAL -3.93%) were down 38.2% and 36%, respectively.

It could have been worse: The stocks were down significantly more mid-month prior to the federal government passing a stimulus plan that contained relief for the beleaguered sector.

UAL Chart

Airline data by YCharts.

So what

Airlines big and small have been crippled by the pandemic and have seen revenue evaporate overnight. Delta, for example, expects second-quarter revenue to fall 80% year over year and said it is losing upwards of $350 million per week.

The carriers have cut a significant portion of their schedules, grounded planes, and frozen hiring, but no amount of cuts can make up for revenue not coming through the door. In years past, weaker airlines typically went bankrupt during run-of-the-mill recessions, and by mid-month the markets were beginning to price in the potential of airline failures.

An air traveler at the airport with a mask on.

Image source: Getty Images.

The government came through with $50 billion to support the industry in late March, temporarily giving lift to the shares. But as United made clear in a memo to employees after the assistance package was finalized, the cash will only prolong the inevitable if traffic does not return.

"If the recovery is as slow as we fear, it means our airline and our workforce will have to be smaller than it is today," management told employees.

Now what

April began as March ended, with United down 18%, Delta 16%, and American 12% on the first day of the month. The stocks fell after the White House issued a grim prognosis of how long the pandemic might last and how severe it might be.

It's nearly impossible to evaluate the airline stocks based on fundamentals today. All three of these companies are trading at less than 3.2 times earnings and less than 0.3 times sales.

If the pandemic is contained in the months to come and traffic begins to return by mid-summer, all of the stocks are almost certainly undervalued. If the pandemic is not quelled soon or the U.S. falls into a deep recession that lasts well into 2021, it is possible there will be no amount of government assistance that can keep the airlines solvent.

My best guess is that travel is likely to return to at least more normal recessionary levels by the fall, and that the airlines have the wherewithal to survive until then. Investors able to handle turbulence in the months to come might want to take a small position in the industry and hope for the best, but for now I'd recommend focusing on the top operators who should be able to withstand the slowdown longer.

Lou Whiteman owns shares of Delta Air Lines. The Motley Fool owns shares of and recommends Delta Air Lines. The Motley Fool has a disclosure policy.

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

Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
DAL
$29.02 (-3.14%) $0.94
United Airlines Holdings, Inc. Stock Quote
United Airlines Holdings, Inc.
UAL
$33.07 (-4.01%) $-1.38
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
AAL
$12.21 (-3.93%) $0.50

*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
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

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.