While the coronavirus outbreak will have a significantly negative impact on the overall global economy, airline stocks are among the sectors that could suffer the highest direct consequences.
Additionally, global connectivity is an important factor of international business and commerce. Therefore, the effects of the economic downturn in the aftermath of the coronavirus outbreak could have negative effects on the global economy long after the current outbreak is brought under control. Just a little more than a century after the Wright brothers’ first flight, international air travel has become the main method of passenger transportation in support of global commerce.
Before the coronavirus outbreak, industry experts anticipated that the total number of flights around the globe in 2020 could exceed 40 million for the first time ever. That annual projection corresponds to an average of more than 110,000 flights every day. However, the cancelation of flights because of the current outbreak might prevent the total number of flights in 2020 from breaking above the 40 million threshold. Furthermore, with just-in-time supply chains and the need for the expedited delivery of finished goods and intermediate manufacturing components, the share of air cargo that is flow across the world has increased as well.
Therefore, flight cancelations will reduce the total revenue for many airlines. While the cancelled flights will reduce their operational costs and be able offset some of the missing revenue, however, the airlines will still have to pay their fixed costs. This will result in reduced profits and could push airline stocks lower.
The coronavirus emerged late last year in the seafood and poultry markets of Wuhan, China. On December 31, 2019, the local government reported that it was treating dozens of infected individuals. Just 11 days later, the state media in China reported the first fatality from the virus. On January 20, the World Health Organization (WHO) reported first cases outside of mainland China — in Japan, South Korea and Thailand. A confirmation of the first case in the United States occurred the next day.
Chinese authorities implemented a quarantine for the entire city of Wuhan on January 23, and the WHO declared a global health emergency just one week later. On January 31, all three major U.S. airlines announced that they were suspending all flights between the United States and mainland China for at least two months. At the same time, President Trump’s administration announced that it would suspend entry into the United States for most foreign nationals who had traveled to China in the preceding two weeks. This was another potential blow for airline stocks.
On February 2, a man in the Philippines became the coronavirus’ first fatality outside China. The number of infected individuals and fatalities escalated from there. By February 10, the coronavirus death toll exceeded the 774 fatalities from the SARS outbreak in 2002. As of February 14, the number of global fatalities rose to nearly 1,400, with 65,000 reported cases of infection. However, some reports indicate that the number of infected individuals might be higher than officially reported.
Effects on Airline Stocks
With the outbreak still far from being under control and the mass production of a viable vaccine at least six to 12 months away, there are no guaranties that the suspension of flights from the United States to mainland China (the ban is currently in effect through early April) will not be extended. Even without any extension of the flight suspension, the potential overall economic downturn might have negative effects on U.S. airline stocks. At this point, the fate of airline stocks is highly uncertain. However, here is an overview of how major U.S. carriers have fared recently and some indications of which direction each airline stock might take going forward.
American Airlines Group, Inc. (NASDAQ:AAL)
American Airlines Group’s stock has struggled over the past few years as its share price lost more than a third of its value over the past three years. While it pays an income distribution to its shareholders, the company’s annual payouts have remained flat at $0.40 since American Airlines began distributing dividends in 2014. Furthermore, while 30% above the company’s own 1.02% five-year average, American Airlines’ dividend yield of 1.33% has been driven higher by the share price decline. Additionally, the current yield also is lower than the 2% average of the overall market.
However, on the positive side, the company has managed to beat analysts’ earnings expectations in all of the last four quarters. Furthermore, half of the 18 analysts currently covering the stock have a “Buy” (five) or “Strong Buy” (four) recommendation. Also, the current share price has more than 17% room on the upside before it reaches the analysts’ current $35.41 average target price.
Moreover, after dropping 13.5% in January 2020 amid negative outbreak news and the news regarding the flight suspensions, the share price recovered all those losses over the past 45 days. The 15% gain since late January was enough to reverse the decline of the stock’s 50-day moving average. Interested investors should monitor the stock’s movement to see whether the share price will rise above the current resistance level of $30.92. If it does, this movement could push the 50-day moving average above its 200-day equivalent and signal a potential bull run.
Delta Air Lines, Inc. (NYSE:DAL)
Delta Airlines’s stock delivered solid gains over the past year and has maintained a positive outlook going forward. The share price gained more than 17% by itself over the trailing 12-month period. Furthermore, combined with an above-average dividend yield of more than 2.7%, Delta Airlines has rewarded its shareholders with a total one-year return on their investment of more than 20%.
In addition to delivering an above average yield, the airline has also hiked its annual dividend payout every year since beginning distributions in 2013. The current $0.403 quarterly dividend payout is 15% higher than the $0.35 distribution from the same period last year. Since the introduction of dividends in 2013, the company has enhanced its annual payout amount nearly seven-fold. This advancement pace corresponds to an average dividend growth rate of 31% per year. Moreover, with a dividend payout ratio of just 21%, Delta should be able to easily continue its annual payout hikes as the current payouts are well-covered by the company’s earnings.
With its strong growth over the past year and its current share price 18% below the average target price of almost $70, it is no surprise that analysts have a favorable outlook on the stock’s near future. All 18 analysts who are currently covering the stock recommend either a “Buy” (11) or a “Strong Buy” (seven).
United Continental Holdings, Inc. (NASDAQ:UAL)
United Continental Holdings’s stock was trending relatively flat for the trailing one-year period before dropping significantly in the second half of January 2020. After some volatility at the beginning of the trailing 12-month period, the share price managed to gain more than 8% before reaching its 52-week high of $95.28 on July 18, 2019.
After peaking in mid-July 2019, the share price gave back most of those gains and fell to $89.70 by January 17, 2020. This was less than 2% above the price level from the onset of the trailing 12 months. However, the share price dropped subsequently by 18% before hitting its 52-week low of $74.80 on January 31.
Despite being 35% below the analysts’ average target price of nearly $110, United’s share price does not inspire too much confidence. Only six of the 18 analysts covering the stock are confident enough in the stocks recovery to give it a “Buy” (four) or a “Strong Buy” (two) recommendation.
The share price has bounced slightly and has gained more than 8% since the 52-week low at the end of January. The stock currently trades just slightly above the $80.05 support level. Some investors might see potential in the United stock. However, without any dividend distributions to aid in the potential total returns, investors who are interested in airline stocks might prefer the Delta stock as a better choice for potential total returns.
Ned Piplovic is the assistant editor of website content at Eagle Financial Publications. He graduated from Columbia University with a Bachelor’s degree in Economics and Philosophy. Prior to joining Eagle, Ned spent 15 years in corporate operations and financial management. Ned writes for www.DividendInvestor.com and www.StockInvestor.com.