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Coronavirus Will Cut Into Big Airlines’ Profits Short Term, But History Teaches That Shareholders’ Best Play Is To Wait Patiently For Stock Prices To Recover


History tells us that airline investors today probably should not dump their shares of U.S. airline stocks just because the coronavirus outbreak in China now is beginning to spread around the world.

That, of course, assumes that those bold enough to invest in U.S. airline stocks in the first place likely already are comfortable with higher-than-average levels of risk.

The 2002-2003 outbreak of the SARS virus – a biological sibling of the coronavirus now impacting the globe – took roughly nine months to run its course epidemiologically, and about 12 months to complete its financial impact arch. U.S. airlines’ stocks back then lost about 30% of their value during the SARS outbreak period (about twice the loss experienced by non-travel related stocks during the SARS sequence). But airline stocks rebounded to their pre-outbreak levels within only about three months after it became clear the medical concerns had subsided and air travel demand had fully recovered.

Airline shares followed a somewhat similar path – a dramatic initial price drop followed by a gradual-but-not-excessively-long rebound – around the Ebola outbreak and global scare in 2014. Granted, Ebola was – and is – a much more deadly disease than SARS, but the numbers of people impacted by Ebola outside its region of initial outbreak in Africa were but a fraction of the 8,000 people infected globally by the SARS virus and the 770 who died from it.  So, comparing – and especially predicting – both the medial and financial results of any two or more epidemic, is tricky, to say the least.

History does suggest that the current coronavirus outbreak’s negative financial impact is likely be significant over a one-quarter to one-year time frame, but then effectively will disappear, almost as if nothing had ever happened. Thus, those who recently bought airline stocks as long- or mid-term investments likely have nothing to worry about other than the length of time it will take their shares to reach whatever their original profit goals were.

As a result, those who invested in U.S. airline stocks only recently, and who did so expecting them to be only short-term or merely opportunistic trading investments rather than classic “buy-and-hold” investments have a choice to make. They can take what almost certainly would be short term, modest losses by selling their airline stocks now. Or, they can extend their investment window to give their airline shares time to recover, and perhaps even to reach the price targets on which they initially placed their bets.

Make no mistake about it, the coronavirus outbreak is a bad thing, not only from a humanitarian and global healthcare perspective, but also from the perspective of companies like airlines and manufacturers that have substantial investments in China or in markets closely linked to China. But, if history is even only a partial guide, from an investment and business perspective such disease outbreaks should be viewed as short-term events from which recovery sprouts rather quickly. Historically they have not been the kind of “black swan” some pundits fear, the kind of events that send global markets spinning down into a deep recession.

When the world does experiences one of these occasional and very frightening disease outbreaks the first economic action almost always is a swift curtailment of travel to, from and through the region where the outbreak first appears. The reasons for that are obvious. It’s how humans react instinctively, and how governments, based on their experience and their understanding of how diseases spread, respond. As the tales of U.S. residents returning from China in recent days attest, modern public travel – primarily by airline in the current instance of – is a principle means of the spread of disease, so curtailing or eliminating such travel is the best means of bring an end to the disease’s spread.

So, unless the current strain of coronavirus now menacing the world is somehow very different from all those that spread around the globe before it, coronavirus’ spread will begin slowing very soon now (once all those already infected but now out of China actually either develop active symptoms and are themselves quarantined or pass the time frame for symptom manifestation without any such symptoms).

However, the financial impact on airlines and other travel companies that have been or continue to be exposed to the coronavirus outbreak will be large.

Most notable among them will be United Airlines, which carries more travelers between China and the United States than any other airline, including any of the Chinese carriers serving those markets. More than 17.3% of United’s capacity, measured in available seat miles, is deployed on routes over the Pacific (with a majority touching China). Meanwhile both of its larger rivals, Delta and American, deploy just  9.9% and 7.8%, respectively, of their capacity U.S.-Asia routes, with smaller percentages of that capacity actually deployed to China. (Note: Hawaiian Airlines has 34% of its capacity deployed on routes to Asia, but it’s 6.85 billion available seat miles on U.S.-Asia routes is a mere one-sixth the size of United’s Pacific capacity).  

United’s significantly greater exposure to China – as a result of its purchase more than 30 years ago of Pan Am’s historic trans-Pacific route structure – explains better than anything else why its shares have lost 9.3% of their value since Jan. 23, when news of the coronavirus outbreak in China was just beginning to catch investors’ attention. Delta and American have seen their share prices fall just 4.9% and 2.3% respectively over the same time frame.

Now both United and American are planning to reduce significantly their service to China, albeit not for another week so that their customers currently visiting China can get home before those flight cuts take effect. It’d be nice to think that United and American are taking those steps as a way of keeping the virus from coming to this country, but both readily admit their decisions are driven by a dramatic and swift reduction in demand for travel to China (and the Chinese government’s efforts to prevent some, and reduce all travel from China to other countries), not a disease control motive. Airlines from most other nations that have service to and from China also are reducing or temporarily eliminating such service.

Clearly United, and to only lesser degrees Delta, American and Hawaiian, will feel the short-term financial impact of the disease and result service cutbacks very quickly. Their first quarter profits will be smaller, though at this point it is hard to see these carriers being pushed all the way into the red as a result of this disease outbreak. In recent years, as more and more service, much of it operated by Chinese carriers, has been added to the U.S.-China air market, the U.S. carriers serving those markets have seen their profit margins shrink or disappear. Thus, reduced exposure to such a market might not be an entirely negative temporary outcome.

In a research note last week Stifel Nicolaus analyst Joe DeNardi noted that back in 2014, during the Ebola outbreak, what moved U.S. and foreign airline shares downward was not  “uncertainty” – the classic excuse used for sudden movement in stock prices in reaction to major global news events – but actual, calculable financial impacts. Thus, he calculates that if fare prices this time around for flights to and from Asia (not only to the U.S. but to other nations) follow the 2014 Ebola outbreak pattern airlines could see between 10% and 45% of the profits that they initially were expected to earn this year never materialize.

So, there will be short term financial pain for U.S. and other carriers as a result of the coronavirus.

But for those investors already holding shares in those airlines the smart play, however much it is against their original intent in buying those shares, may well be to hold on them and wait for the likely full recovery of their share prices – probably sometime later this year or early in 2021. To be sure, the profits not earned this year because of the coronavirus won’t ever come back. And as a result, carriers’ cash flows and resulting ability to invest in planes, equipment and other assets and new services may be modestly reduced.

But history tells us that unless there are additional awful events negatively impacting their operations and revenues in some huge way, airlines rebound from such exogenous events rather quickly and, at least from a shareholder’s perspective, things get back to normal pretty quickly.



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