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Why Shares of Airlines Are Falling Today

By Lou Whiteman – May 28, 2020 at 3:37PM

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There is no quick turnaround in sight.

What happened

After a brief rally earlier in the week on hopes of an improving economy, airline shares are in the red once again on Thursday. Some of the nation's largest airlines are proceeding with plans to try to cut their headcount, a clear indication that despite glimmers of hope the worst is behind us, management teams still expect a long, rough road ahead.

Shares of American Airlines Group (AAL -0.54%) were down 6.6% as of 2:30 p.m. EDT and shares of United Airlines Holdings (UAL 1.18%) were down 4.4%. Delta Air Lines (DAL 0.84%), which earlier in the day was down 5.2%, had recovered some of that loss, but were still down on a day when broader markets are up.

So what

Airline shares have been hit hard by the COVID-19 pandemic, which has reduced travel demand to a trickle and caused carriers that a few months ago were focused on expansion to instead worry about their survival. The companies are stable, in part thanks to $50 billion in government assistance for the industry as part of the CARES Act stimulus plan, but that stability has come with a price.

An airplane landing at night.

Image source: Getty Images.

As part of the terms of the stimulus funding, airlines are prohibited from doing any layoffs or involuntary separations through Sept. 30. Lawmakers were hopeful that if the travel slump was temporary, large numbers of layoffs could be avoided.

As we head into June, airlines seem increasingly skeptical about a quick recovery. United Airlines has been blunt in forecasting reductions since March, warning that furloughs were inevitable even as they were accepting bailout cash.

Delta and American are also looking to shrink. American is seeking to cut more about 30% of total managerial and administrative support positions, or about 5,000 jobs, initially via voluntary buyouts but through layoffs if necessary. The airline said employees will remain on the payroll until Sept. 30, 2020, as required by the CARES Act, but will be dismissed after that date.

Meanwhile, in a memo to employees, Delta outlined its own buyout package, offering four to 20 weeks of severance, a year of paid medical coverage, and travel benefits. Those who qualify for early retirement would get up to 26 weeks of severance and two years of medical coverage.

Now what

The message is clear: No matter what happens with the pandemic and the economy, the airlines expect to be considerably smaller in the years to come than they were on Jan. 1. It's too soon to say what will ultimately become of the companies, in part because it is impossible to predict a pandemic, but even in the best-case scenarios we're not getting back to normal any time soon.

The good news, if there is good news, is that the sector is incredibly cheap by historical measures right now, with all of the carriers trading at less than one times their revenue over the last 12 months. Assuming the companies survive and eventually return to pre-pandemic levels, there is a lot of upside from here.

Given the uncertainty, it is dangerous to assume. But for those with a tolerance for risk and interest in nibbling on airlines, I'd advise choosing carefully to make sure you are holding the companies with the highest odds of flying through the crisis.

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

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Stocks Mentioned

Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
DAL
$28.30 (0.84%) $0.23
United Airlines Holdings, Inc. Stock Quote
United Airlines Holdings, Inc.
UAL
$32.91 (1.18%) $0.39
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
AAL
$11.97 (-0.54%) $0.07

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

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