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Why Airline Shares Fell Today

By Lou Whiteman – May 5, 2020 at 6:07PM

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United is making plans to shrink come fall.

What happened

Airline shares were under pressure again on Tuesday following a report that United Airlines Holdings (UAL -1.16%) is plotting significant layoffs once a government ban on job cuts expires on Sept. 30.

Shares of United closed down 4.5%, while shares of Delta Air Lines (DAL -1.34%) fell 3.8%, American Airlines Group (AAL -1.71%) stock was off 3.1%, and shares of Southwest Airlines (LUV -2.53%) fell 4.1%.

So what

The airlines are prohibited from eliminating positions through the end of September as one of the conditions of a $50 billion government bailout that was part of the CARES Act economic stimulus plan. United has been more blunt than most in warning that it could face difficult decisions once that prohibition is lifted, and is reportedly planning to shrink the airline.

An airplane landing at night.

Image source: Getty Images.

Reuters reported Tuesday that United plans to cut at least 3,400 management and administrative positions in October and has told pilots to expect cuts as well. The report quoted a memo from Kate Gebo, United's executive vice president for human resources, explaining that effected employees would be notified in mid- to late July and encouraging workers to consider voluntary separation plans before that date.

"We have to acknowledge that there will be serious consequences to our company if we don't continue to take strong and decisive action, which includes making decisions that none of us ever wanted or expected to make," Gebo wrote.

United is also reportedly seeking to shed upward of 30% of its 12,250 pilots.

The COVID-19 pandemic has shrunk travel demand to near-zero, and airlines are pessimistic there will be a quick rebound once the virus is contained. The stimulus funds were designed to buy the airlines time in the hope a recovery materialized, but from United's perspective, that appears increasingly unlikely.

Now what

There's a certain logic to the layoff talk. United expects to fly fewer passengers in all of May 2020 than it did on single days in May 2019. If that continues, the airline and all of its peers are going to have to become much smaller companies.

Southwest has also mentioned the idea of layoffs or pay cuts with workers, contemplating actions the company was able to avoid even following the Sept. 11 attacks. And if travel remains at near-zero levels through the summer, American, which has the industry's highest debt load, could find itself in a liquidity crunch.

There's still hope that in the months to come, traffic might return to something closer to more-normal recessionary levels and some of the most-drastic scenarios can be avoided. But given the uncertainty, it is hard to blame the airlines for doing some contingency planning now, and equally hard to blame investors for selling and walking away.

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

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Stocks Mentioned

Southwest Airlines Co. Stock Quote
Southwest Airlines Co.
$30.84 (-2.53%) $0.80
Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
$28.06 (-1.34%) $0.38
United Airlines Holdings, Inc. Stock Quote
United Airlines Holdings, Inc.
$32.53 (-1.16%) $0.38
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
$12.04 (-1.71%) $0.21

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

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