Why airline stocks are falling today

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What happened

United Airlines Holdings (NASDAQ: UAL) sees new bookings shrinking as COVID-19 cases increase, putting pressure on airline stocks on Tuesday.

Actions of United and American Airlines Group (NASDAQ: AAL) each traded 5% at noon EDT, while shares of Spirit Airlines (NYSE: SAVE) are down 4%. A number of other airline actions, including Delta Airlines (NYSE: DAL), Southwest Airlines (NYSE: LUV), Alaska Air Group (NYSE: ALK), and JetBlue Airways (NASDAQ: JBLU), all fell by more than 2%.

So what

Airline inventories were hit hard by the initial wave of the coronavirus pandemic, with travel demand apparently bottoming out in late March / early April. We saw a resurgence in demand in the months that followed, prompting United and other airlines to add flights in late summer.

Image source: Getty Images.

But cases of COVID-19 are also increasing in many parts of the country, and this is starting to meet demand. United told employees Monday that the momentum for reservations has waned. The hub of Newark, New Jersey, the airline was particularly affected after New York, New Jersey and Connecticut imposed a 14-day quarantine on visitors to regions of the country where the pandemic is worsening.

Airlines banned from firing staff before September 30 to receive relief funds under the CARES coronavirus aid recovery plan, but United has warned employees that it is likely to decrease significantly this fall. Other airlines, including Delta and Southwest, have also said that in the absence of a substantial increase in demand, they will have to reduce the size of their operations.

Airlines are receiving additional government assistance to cope with a prolonged slowdown. US Treasury Secretary Steven Mnuchin said Tuesday that Delta, United, Southwest, JetBlue and Alaska have all signed letters of intent to receive loans under the CARES law.

Last week, several airlines, including American and Spirit, were the first to sign deals to receive additional government funding.

Now what

The assumption for some time has been that airlines will face a slow, multi-year recovery. Renewed optimism in May and early June, when airlines were planning to resume certain services, seems to have prompted some investors to think that the schedule could increase, but recent measures indicate that airlines still have a long and difficult ascent to come.

The good news is that the sector has done a solid job of strengthening balance sheets, with American industry raising nearly $ 50 billion in private liquidity to match a similar amount in public funds. Even though demand is falling, airlines are well positioned to survive for a long time without going bankrupt, although this will likely result in layoffs and more tight schedules.

For investors interested in buying, be aware that other sectors are likely to recover faster than air travel. If you want to buy, stay with the best operators with the best chance of staying in the air, whatever the challenges ahead.



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