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Stock Market Suffers Late Drop as Airlines Lose Altitude

By Dan Caplinger – Jul 7, 2020 at 5:10PM

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Worries about new coronavirus issues could once again affect the travel industry.

Tuesday finally brought an end to what had been an extremely strong run for the stock market in recent sessions. The Dow Jones Industrial Average (^DJI 1.26%) had been down all day, but reversals in the S&P 500 (^GSPC 1.44%) and Nasdaq Composite led to their losing ground as well.

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Data source: Yahoo! Finance.

Travel-related stocks were among those that fell the most on Tuesday, and airline stocks in particular were under pressure. Even though airlines have gotten much-needed financial assistance from the federal government, it's come at a price -- and investors might not like what they have to pay even if the industry bounces back from what could be a coming second wave of COVID-19 cases.

United worries about the coronavirus

United Airlines Holdings (UAL 1.24%) fell the worst of the major U.S. carriers, declining almost 8%. The airline rebounded strongly when concerns about the pandemic subsided, but now that they're back, United is seeing signs that it's affecting its business.

United told its employees on Tuesday that there's a significant chance that the rebound in travel could reverse itself. Already, the company is seeing travel bookings weaken. One big reason is the emergence of state measures aimed at residents of other states, as state governments across the tri-state New York metropolitan area are looking to force travelers coming from areas with high numbers of new COVID-19 cases to quarantine.

Airplane on a taxiway with United logo on it, on a mostly cloudy day.

Image source: United.

To cut costs, United is asking workers to take voluntary severance packages. However, the airline had hoped more of its employees would take advantage of the opportunity. As a result, employees might have to take furloughs, and United might even consider layoffs once it's allowed to impose such measures after Sept. 30.

Financial assistance can only last so long

Meanwhile, several airlines have worked on negotiating final terms for the aid packages they're getting from the U.S. Treasury. American Airlines Group (AAL 1.93%) got its deal done last week, and Delta Air Lines (DAL 2.38%) and Southwest Airlines (LUV 2.26%) are considering whether they'll need to tap into the loans that the federal government has made available.

Some airlines have been reluctant to accept aid, in large part because it limits their ability to react operationally to quickly changing industry conditions. In addition to prohibiting layoffs through the end of September, airlines that take loans have to offer the government an equity stake through warrants and lose the ability to fully control what they pay their corporate executives.

There's also hope that passengers will keep flying. More than 755,000 people went through TSA airport security checkpoints on July 6, with counts topping 700,000 in four of the past five days. That's still far below the 2.7 million to 2.8 million passengers who traveled on the first Sunday and Monday of July last year.

The way that airline stocks are behaving shows the importance of solving the coronavirus crisis as quickly as possible. Until the pandemic gets under control, major swaths of the global economy will remain at risk.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Delta Air Lines and Southwest Airlines. The Motley Fool has a disclosure policy.

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