The airline industry is one of the hardest hit by the current pandemic, and there is one reason why it may never reach its former heights again
It has not been a good year for airlines. Here’s a quick recap of the major U.S. carriers performance year-to-date:
- Delta (NYSE:DAL): down 59.57%
- American (NASDAQ:AAL): down 63.25%
- United (NASDAQ:UAL): down 71.42%
- Southwest (NYSE:LUV): down 41.58%
- Spirit (NYSE:SAVE): down 72.15%
- JetBlue (NASDAQ:JBLU): down 57.07%
When a company has lost 42% of its valuation in three months and is leading the pack, you know the industry is in trouble. Demand for travel has plummeted and airlines are grounding the majority of their flights, with the ones that are still flying only taking a fraction of what they would usually. Stats show passenger numbers are at 8% of the same time last year, with revenue even less than that due to reduced prices.
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The industry is hemorrhaging billions of dollars at a fast clip and has had to look to the government for a bailout in the form of $25 billion in direct grants and another $25 billion in loans. The grants are premised on the airlines keeping their employees on the payroll and maintaining service in airports in which they serve. This bailout will work to stem the flow of blood, but a fast recovery is not on the cards. The coronavirus has enveloped the industry in unpredictability, with discretionary travel being one of the last steps on the path back to normality.
However, normality will ensue. It may take quite a while, but it will, and investors may eye up the downtrodden airlines as a way of making a quick buck on their return to former glory. If you invested in United at its 52-week low and it recovered to its 52-week high, you would nab yourself a 5-bagger. It’s been there before, it can get there again, right? There is one big caveat to this, and it’s the reason why airlines may never fully recover from the effects of this pandemic.
Death of a (traveling) salesman
Business travel is going to be one of the biggest long-term corporate casualties of the coronavirus. It is a relic of times gone by and one which was slowly being gnawed away at by more modern, forward-thinking companies already. Services like Slack (NYSE:WORK), Zoom (NASDAQ:ZM), and Microsoft (NASDAQ:MSFT) Teams ensure the efficacy of remote working and turn face-to-face meetings into a luxury rather than a necessity. As businesses around the world are forced to adapt in order to maintain operations and working from home becomes the new norm, the use of these types of technologies has been ramped up. They will look to cut expenses in what will be testing times, and replacing business class flights and hotel stays with a Zoom subscription will be an offer too good for most management teams to pass up.
For anyone who has seen the movie ‘Up in the Air’, they do a pretty good approximation of my point. The gist of it is that George Clooney flies around the country firing people, but his character’s role is under threat by a new employee who thinks his job can be replaced by videoconferencing. Conflict ensues, they live, they laugh, they love, and most importantly they learn. You didn’t come here for a review of, ironically, a movie most people will end up watching on a plane, but it tells the tale of a dying breed in corporate America. An expensive and out-dated process carried out because ‘that’s the way we’ve always done it’. Now that companies are forced to adapt to new, more cost-efficient methods, I can’t see a world in which they revert back to the old way once we resume normality.
While business travel makes up only 12% of total passengers, they are twice as profitable and depending on the flight in question, it can account for more than half of an airline’s profits per flight. Business-class is usually around 10 times that of economy travel and spending habits of corporations vary drastically to that of individuals. Last-minute flights, non-stop travel, premium services, and business or first-class upgrades are all well within the remit of corporate travel and are where airlines bank big margins. As a shift in perspective on business travel and expenditure is being forced on much of the corporate world in these trying times, corporate travel will become a dwindling revenue stream.
They may look like bargains, but investing in airlines is fraught with danger. With no end in sight for the pandemic and its most profitable revenue stream in danger of becoming obsolete, the risks look to far outweigh the rewards.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.