Airline stocks have been pretty battered so far this year in the wake of the coronavirus pandemic. Demand for air travel has waned substantially, impacting airlines’ bottom lines to a massive extent.
Some of the airline stocks in fact lost half of their values last month. To make matters worse, the International Air Transport Association has estimated that global airline losses from the coronavirus pandemic have jumped to $314 billion, 25% more than the initial projection.
No doubt, many of the companies are now seeking ways to cut costs by reducing flights and grounding planes. Such companies are heavily dependent on government grants to make payrolls and avoid mass layoffs.
In a positive move, the U.S. Treasury Department and major U.S. airlines reached an agreement on principle aimed at curtailing layoffs. So, what’s the sum and substance of the deal? Notably, 10 of the top 12 U.S. carriers have agreed to accept a $25-billion federal aid in exchange for allowing the department to have a small ownership stake.
In other words, the grant will include a mix of cash and loan, with the government getting warrants from carriers that can be converted into small ownership stakes in some of the leading airlines. The major carriers, in fact, will receive 70% of the funds in cash that need not be paid back. But the rest 30% of the assistance needs to be repaid.
It is to be noted that the $2-trillion coronavirus aid package signed into law last month included the $25-billion relief for airliners. But the Treasury Department has been negotiating with the carriers regarding the terms, especially related to the paying back of 30% monetary assistance.
By the way, two of the largest U.S. carriers, Spirit Airlines and Republic Airlines have been in discussions with the Treasury Department. And those that agreed to the payroll support program include Alaska Air Group, Inc. ALK, Allegiant Air, American Airlines Group Inc. AAL, Delta Air Lines, Frontier Airlines, Hawaiian Airlines, JetBlue Airways Corporation JBLU, United Airlines Holdings, Inc. UAL, SkyWest Airlines and Southwest Airlines Co. LUV, as confirmed by Treasury Secretary Steven Mnuchin in a statement on Apr 14.
Mnuchin added that “the Treasury is also working to review and approve applications for smaller passenger air carriers as quickly as possible and will provide further guidance for cargo carriers and contractors very soon. We look forward to working with the airlines to finalize the necessary agreements and disburse funds as quickly as possible.”
Now the question is, how much do the big four get individually? Delta confirmed that it will receive $5.4 billion. This includes a 10-year low-interest rate loan of $1.6 billion and the government will be acquiring a 1% stake. The government will acquire Delta stock at $24.39 a share over five years.
Delta CEO Ed Bastian said that the “funding, along with self-help measures we have taken, will prevent furloughs and pay rate reductions through the end of September, despite the 95 percent drop we've seen in passenger traffic.”
Fort Worth-based American Airlines said that it will get $5.8 billion, including $4.1 billion in grants and $1.7 billion in low-interest loan backed by warrants that maybe converted into company’s shares. CEO Doug Parker and President Robert Isom said that “with this level of assistance, we now believe we have the financial resources necessary to help us withstand this crisis and be in position to serve the traveling public when they are ready to start flying again.”
Dallas-based Southwest Airlines will receive $2.3 billion in direct payroll support and $1 billion in low-interest loan backed by warrants. And for United Airlines, these figures are at $4.3 billion and $1.8 billion, respectively.
Airlines Rescue Package Rolls In, Shares Rocket Up
The aforesaid U.S. carriers, including the big four, saw their shares rally on Apr 14 after the government agreed on the $25-billion aid for meeting payroll requirements. Among them, here’re the top five carriers whose shares have not only gained meaningfully but are also fundamentally in pretty decent shape.
The current low fuel costs are certainly aiding bottom-line growth for airliners, with United Airlines, Alaska Air, American Airlines, JetBlue Airways and Southwest Airlines being no exception. For quite some time, oil prices have been dropping like a stone. After all, the coronavirus pandemic has hammered demand for oil and led to oversupply issues.
Meanwhile, American Airlines’ focus on operating cargo-only flights is a positive and should boost its top line. And its quite impressive on JetBlue’s part as well to reward shareholders in these trying times. Similarly, United Airlines’ efforts to reward shareholders through buybacks are heartening.
What’s more, the expected earnings growth rate for the next five years for United Airlines, Alaska Air, American Airlines, JetBlue Airways and Southwest Airlines are 12.5%, 14.6%, 5.8%, 22.1% and 3.6%, respectively. All these airline companies currently possess a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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