Since the stock market bottom on March 23, there have been several positive developments. Some of the areas hardest hit by the coronavirus are seeing a deceleration in case counts which is showing that social distancing is working. Fiscal and monetary authorities have stepped up with meaningful packages and initiatives to prevent a self-feeding, downward spiral.
The conversation has moved from shutdowns to setting the parameters for reopening the economy. Many states in the South are not seeing a spike in cases despite being late and laxer on shutdown measures which increases the likelihood that the virus is less contagious in warm and humid weather. The broader stock market has put together an impressive bounce, retracing about half of its losses. Some individual stocks have even managed to exceed their pre-Coronavirus highs.
Airline Stocks Struggling
Despite these improvements, the airline stocks have not seen any meaningful bounce. The airlines ETF (NYSE: JETS) is 10% above its low and has largely traded in a sideways pattern. This is an indication that the market is not anticipating a return to normal anytime soon for the sector. It's difficult to imagine air travel immediately returning to pre-coronavirus levels, especially if a vaccine is not developed.
It also seems as if coronavirus hot spots correlated to areas that were near airports. If shutdowns end prematurely and there is a second wave in certain areas, it's uncertain how it would affect air travel especially given its role in spreading the disease. Further, many conferences and business travel have already been canceled for the year.
Airlines are Cyclical in Normal Times
TSA travel data shows that around 90,000 to 100,000 passengers are being screened per day in the past month which is a big drop from the typical 2 to 3 million that are screened per day. If this continues, it's a certainty that airlines will have to go bankrupt. Air travel is a notoriously tough business, and there have been many bankruptcies throughout their history.
They follow a pattern of increasing capacity when profits are high which leads to increased competition, new entrants and then competing on price. This leads to falling prices and margins which leads to bankruptcies, capacity cuts, and the cycle repeats. Thus, the coronavirus hit an industry that often sees bankruptcies due to cyclical factors.
Bailout Package Terms
This time, it is different given that current airline weakness is due to a once in a century global pandemic and bad decisions by management. Thus, there's much less resistance especially as the bailout is contingent on airlines keeping workers on payroll. Alaska Air (NYSE: ALK), Allegiant Travel (NYSE: ALGT), American Airlines (NYSE AAL), Delta Airlines (NYSE: DAL), JetBlue (NYSE: JBLU), United Airlines (NYSE: UAL), and Southwest (NYSE: LUV) are among the beneficiaries.
In total, the airlines will receive $25 billion which is structured as loans and grants with the Treasury also receiving warrants which will vest, if their stock prices meaningfully appreciate. Under the bailout terms, the airlines will have to pay back 30% of the funds within 5 years, and they won't be allowed to make any staffing cuts till September.
The government is paying the airlines to maintain their payrolls and ensure that operations will continue if the economy normalizes by the fall. The alternative would be airlines laying off workers into an economy when the unemployment rate is already near 20%. It would also mean less federal receipts from payroll and income tax and more payouts in unemployment insurance.
The bailout is more of a bailout for airline employees than the airlines. Nothing has changed about the airline business that will lead to more revenues or earnings. If anything, it will prevent cost-cutting measures like laying off workers that precede a company's descent into bankruptcy.