Airline shares rocketed higher on Monday, propelled by a promising development in the quest to find a vaccine for the novel coronavirus that causes COVID-19. That momentum extended to companies that rely on aviation for a significant portion of their revenue.
In a matter of a few months, airlines have gone from a focus on expansion to survival mode, trying to weather a severe drop-off in travel caused by the pandemic. That means grounding planes, cutting flights, and deferring new plane deliveries.
Companies like Air Lease, Triumph, and Howmet are feeling the ripple effects of those decisions. Air Lease buys aircraft and leases them to airline customers, carrying significant debt on its books with the assumption that airline lease payments will cover the interest expense. Triumph and Howmet both make spare parts and components for jets. Fewer planes in the air and fewer flights mean less demand for parts, eating into their businesses.
On May 7, Air Lease highlighted the uncertainty these customers are facing. Most of its customers had requested some form of accommodation due to their financial distress, the company said, and it expects that trend to continue: "Given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our business, results of operations and financial condition for the foreseeable future."
Howmet, recently spun out of Arconic Inc. along with its sibling Arconic Corp., has suspended its dividend and is looking to cut annualized costs by about $100 million. Triumph has furloughed 2,300 employees. All of these companies need airline traffic to return as soon as possible, to ensure that their businesses survive and grow.
The airlines, and with them their suppliers, got a boost on Monday after promising phase 1 trial results on a vaccine were released. The sooner the pandemic is contained, the better for airlines, and a vaccine would be a step in the right direction.
You wouldn't know it from the market's reaction on Monday, but the vaccine-trial results that sent shares skyrocketing are early-stage results that still have to be replicated in larger trials. Even if all goes well, it will still be many months (if not longer) before a vaccine is ready for the public; even in the best-case scenarios, airlines will likely be flying into a recession, and are unlikely to restore operations to pre-pandemic levels for years.
But shares of all three of these companies are down at least 45% year to date even after Monday's rally. Investors are fearing the worst, worried that companies like Triumph won't be able to make it through a prolonged slowdown. Monday's news provides reason for hope that the worst can be avoided, though, and that was good for at least a one-day rally in the shares.