What happened
United Airlines Holdings (UAL -1.82%) is seeing new bookings decline as COVID-19 cases spike, and that's putting pressure on airline stocks on Tuesday.
Shares of United and American Airlines Group (AAL -1.60%) each traded down 5% as of noon EDT, while shares of Spirit Airlines (SAVE 6.46%) are down 4%. A number of other airline stocks, including Delta Air Lines (DAL -0.45%), Southwest Airlines (LUV 1.09%), Alaska Air Group (ALK -0.78%), and JetBlue Airways (JBLU 0.59%), were all down more than 2%.
So what
Airline stocks were hit hard by the initial wave of the coronavirus pandemic, with travel demand seemingly bottoming out in late March/early April. We've seen a resurgence in demand in the months since, which has caused United and other airlines to add flights heading into late summer.
Image source: Getty Images.
But COVID-19 cases are also on the rise in many areas of the country, and that is beginning to eat into demand. United told employees Monday the booking momentum has faded. The airline's Newark, New Jersey, hub has been hit particularly hard after New York, New Jersey, and Connecticut imposed a 14-day quarantine on visitors from parts of the country where the pandemic is growing worse.
The airlines were prohibited from laying off staff before Sept. 30 as a condition of receiving relief funds through the Coronavirus Aid, Relief, and Economic Security (CARES) Act stimulus package, but United has warned employees it is likely to shrink significantly this fall. Other airlines, including Delta and Southwest, have also said that, absent a substantial uptick in demand, they are going to have to reduce the size of their operations.
The airlines are getting added help from the government to weather an extended downturn. U.S. Treasury Secretary Steven Mnuchin said Tuesday that Delta, United, Southwest, JetBlue, and Alaska have all signed letters of intent to receive loans as part of the CARES Act.
Last week several airlines, including American and Spirit, were the first to finalize deals to receive additional government funding.
Now what
The assumption for some time now has been that the airlines will be facing a slow, multiyear recovery. A bout of optimism in May and early June as airlines made plans to resume some service seemingly caused some investors to believe the timetable might be moving up, but these latest moves indicate the airlines still see a long, tough climb ahead.
The good news is the sector has done a solid job fortifying balance sheets, with the U.S. industry raising nearly $50 billion in private liquidity to go along with a similar amount in government funds. Even if demand is waning, the airlines are well-positioned to survive for an extended period without ending up in bankruptcy, though it will likely mean layoffs and more schedule contraction.
For investors interested in buying in, be warned that other sectors are likely to recover faster than air travel. If you do want to buy, stick with the top operators with the best chance of remaining airborne no matter what challenges lie ahead.
