Coronavirus raises worries about a broad slowdown in air travel
Foreign travelers wearing masks walk past a departures information board at Beijing International Airport in Beijing, China as the country is hit by an outbreak of the new coronavirus, February 1, 2020.
Jason Lee | Reuters
The rapid spread of the new coronavirus is testing airlines and other travel companies with a risk that had been nearly unthinkable over the past decade: a broad decline in travel demand.
Air-travel demand had been growing at twice the pace of the global economy, but that bright spot is now at risk. U.S. airlines and other travel stocks have tumbled more than the broader market in this week’s rout as big conferences were canceled and fears grew that customers may just opt out of trips because of the spreading COVID-19 outbreak.
The issue caps a difficult year for airlines that have been grappling with the nearly yearlong grounding of the Boeing 737 Max. Carriers need demand to stay robust, particularly in the lucrative spring and summer travel seasons, and analysts are warning that that looks unlikely.
The NYSE Arca Airline Index, which tracks 16 carriers in North America, Latin America and budget carrier Ryanair, has dropped more than 15% this week as of Wednesday’s close, putting it on pace for its biggest weekly percentage loss since March 2009 — during the last recession. American Airlines shares on Wednesday closed the lowest since before its 2013 merger with US Airways and United Airlines, which suspended its full-year guidance this week because of the virus, fell to a more than two-year low.
Shares continued to slide on Thursday, led by American with a more than 7% drop after analysts downgraded it and its competitors. American has a higher debt load than its rivals, which has contributed to larger declines in stock price.
“Every day we think we could be near a bottom, and every day we are not,” Cowen airline analyst Helane Becker said in a note Thursday.
Deutsche Bank on Thursday downgraded American, Alaska, Delta, Spirit, JetBlue and United stocks to hold from buy, saying it “is becoming increasingly more likely that the spread of COVID-19 will disrupt travel patterns beyond China.”
More than 81,000 people have been sickened with coronavirus and new cases are rising outside of China, where most of the cases have been reported. The Centers for Disease Control and Prevention on Wednesday advised the public to avoid all nonessential travel to South Korea. Saudi Arabia on Thursday announced it will temporarily suspend the entry of foreigners for pilgrimage and tourism purposes.
Air travel demand this year will fall for the first time in over a decade and cost airlines more than $29 billion in revenue, the International Air Transport Association warned last week.
Airlines have already canceled more than 200,000 flights, mostly to, from and within China because of the virus. Now they are mulling other changes. Delta slashed its service to South Korea, home to the largest outbreak outside of China, to 15 weekly flights from 28. All three major U.S. airlines have suspended flights to mainland China and Hong Kong and waived cancellation and change fees for China and South Korea as demand collapsed.
U.S. airlines, which historically have experienced boom-and-bust cycles, have just posted their 10th consecutive year of profitability, but their future performance will hinge on whether demand declines sharply in the U.S.
Social media’s effect
Some carriers are already preparing for flyers too worried to travel. The last global outbreak of this scale was SARS just under a decade ago, but the fast spread of information could lead travelers to change their plans more quickly now, analysts said.
“We didn’t have Facebook and Twitter,” said Darryl Genovesi, airline analyst at Vertical Research Partners.
The CDC on Wednesday reported the first possible case of “community transmission” of the coronavirus. The Northern California resident had no travel history or contacts that would have put the person at risk, the CDC said. While the number of confirmed cases in the U.S. is still relatively low, some airlines are preparing for passengers to be too scared to travel.
JetBlue Airways in a surprise move Wednesday, said it would waive fees that can reach $200 for travelers who want to cancel or change the date of tickets they buy from Thursday through March 11, a measure that pressures other U.S. airlines to follow suit.
‘Fear makes people cancel’
“The risk here for airlines is this triggers a broad slowdown in travel,” said Samuel Engel, head of the aviation practice at consulting firm ICF. “Airlines are by their nature diversified enterprises. They can withstand a loss of traffic on a single route or region but where the airlines get hit is when the fear makes people cancel or postpone trips.”
The virus will also test airlines’ reliance on high-paying corporate travelers. Carriers have also poured millions into refreshing their cabins to cater to high-paying corporate travelers. Delta has said premium-ticket revenue growth has outpaced coach class over the past several years.
The Global Business Travel Association warned Thursday that the virus could cost the travel industry close to $560 billion this year in revenue, a third of the 2020 forecast business travel spending as trips to Europe, Asia and elsewhere are called off because of the virus.
Unlike during numerous other downturns like the Sept. 11 terrorist attacks or the financial crisis and recession, airlines have consolidation on their side. Mega-mergers left four airlines — Delta, American, United and Southwest in control about three-quarters of the U.S. market. A sharp decline in fuel prices may help soften the impact from lower demand but airlines have fixed costs like employee salaries, notes Vertical Research Partners’ Genovesi.
Investors are now eagerly waiting further guidance from airlines on this quarter and year’s results, which is difficult to calculate because it’s not clear how long the virus will last, prompting United to withdraw its full-year guidance.
Airline executives on earnings calls last month expressed confidence about the health of consumers, particularly in the U.S., a market they’ve touted for years as a steady source of strength along with bolstered balance sheets compared with previous times of turmoil.
In an investor day presentation in September 2017 American’s CEO Doug Parker said: “I don’t think we’re ever going to lose money again.”