Airline stocks are in for another major decline come autumn as a wave of mass bankruptcies is looking more and more likely.
There’s no question that the global pandemic has hit the travel sector the hardest. Airline stocks have been some of the worst-hit as the highly-leveraged businesses behind them struggle against high fixed costs. Government bailouts saved U.S. airlines back in April, but things could get much worse for the industry before they get better.
There are many reasons to expect a wave of bankruptcies in the airline sector, not least of which is the pandemic. As long as contracting a potentially deadly, airborne virus is on the cards, travel won’t return to normal levels. That’s especially true in the U.S., where driving is possible for most destinations. Most people will choose sitting alone in a car over packing into a small space with hundreds of strangers.
Just the fear of renewed virus outbreaks is enough to halt air travel and crush airline stocks. But now that some U.S. states are seeing spikes in new cases, there are even more complications for carriers.
Legislators are starting to implement 14-day quarantine measures for travelers who’ve visited a hotspot. It appears international leaders are also planning to put the breaks on U.S. visitors. European leaders are considering barring U.S. travelers from entering once the region’s borders reopen.
Even if America can control the most recent outbreaks, airlines are going to need another cash infusion to stay afloat. Unions representing aviation workers have started pressing lawmakers for another loan. This week, they petitioned Congress for an additional $32 billion of support to keep airlines from conducting more layoffs.
The government’s first $32 billion loan is meant to last through the end of September, but with some estimating that air travel won’t return to normal levels for at least three years, that funding simply won’t be enough.
Back when the pandemic struck, the government’s sweeping cash infusions were widely praised, especially among investors holding airline stocks. But when taxpayers take a closer look at exactly what they’re paying for, they could start to demand tighter restrictions.
One of airlines’ highest costs is their payroll, a burden the CARES act saught to lighten via government loans. The loans included executive pay caps, but they were generous, to say the least.
Take United Airlines CEO Oscar Munoz, for example. In 2019, Munoz made roughly $12,500,000. Under the CARES Act executive pay restrictions, Munoz compensation in 2020 would be $7,750,000 or almost two-thirds of his normal pay. If you assume that all of United’s execs are paid about two-thirds of their normal salary, that’s nearly $27 million worth of taxpayer money.
On top of that, there’s the fact that airline captains make upwards of $100,000 per year— roughly double the average American’s wage. At some point, people are going to get tired of using their tax money to pay their salaries.
In September, with an election just months away, lawmakers will be hesitant to offer another handout. That means if there is a second round of bailouts, they will probably come with more stringent pay caps. But that could push many of the sector’s execs to file for bankruptcy instead of accepting a government loan simply because it means they’ll get better compensation.
It’s difficult to say which airline stocks will succumb to bankruptcy first. Investors initially pointed to American Airlines (NASDAQ:AAL), whose $21.56 billion pile of long-term debt is one of the largest in the industry. United is another candidate; the firm’s debt to equity ratio is a whopping 144.
Meanwhile, low-cost, regional carriers Southwest (NYSE:LUV) and JetBlue (NASDAQ:JBLU) aren’t as highly leveraged and can likely survive longer without another cash infusion.
Disclaimer: This article representst he author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned companies.
Last modified: September 23, 2020 2:01 PM