Why Coronavirus Is Causing Airline Shares To Plummet In Value

Amid fears that the coronavirus is spreading beyond China, share markets are in retreat this week and airline share prices are no exception.

Why Coronavirus Is Causing Airline Shares To Plummet In Value
Airline share prices are taking a battering this week as the impact of coronavirus begins to bite. Photo: Pixabay.

Airline stocks take a battering

United Airlines opened on the Nasdaq on Monday morning at a touch over USD$78. They closed on Tuesday evening at USD$70.58. IAG, the owner of British Airways and Iberia, opened on the LSE on Monday morning at 623.00p. They closed last night on 551.40p.

American Airlines’ share price dropped 8.5% on Monday, closing at USD$25.45, a four-month low. The slide continued on Tuesday, closing at USD$23.12.

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It was a pattern repeated at stock exchanges around the world on Monday and Tuesday. Some stock exchanges have already opened for Wednesday trading and share prices continue to fall.

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Constant continuous shock syndrome

Airlines, vulnerable as they are to external forces, are always amongst the first companies to feel the effects of wider economic downturns. You may need to keep buying food to eat but the vast majority of us do not need to keep flying.

One airline boss said that, even before coronavirus, the wider aviation operating environment was constantly challenging. He said an airline needed to be structured so as to keep flying in the face of continuous challenges. He called it constant continuous shock syndrome, saying an airline needed to be very robust to survive.

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Problem to get worse before it gets better

The Chinese carriers are the most heavily impacted, with more than 200,000 flights to, from and within China already canceled. But any airline operating services to and within Asia is adversely affected.

Why Coronavirus Is Causing Airline Shares To Plummet In Value
The Chinese carriers will be the worst impacted by the slump in demand. Photo: Sergey Kustov via Wikimedia Commons.

The problem is set to get worse before it gets better. There are reports of coronavirus outbreaks in South Korea and Italy and talk of closing borders to citizens of more countries. There are no indications that the coronavirus outbreak has peaked.

The multi-faceted problem for airlines

The problem for airlines is multi-faceted. As existing flights are canceled and/or suspended, airlines are foregoing revenue from future ticket sales and incurring expenses by issuing refunds on prior ticket sales.

Further, there are signs of deep discounting to stimulate short term future travel. Last night, I was to able to buy a ticket from Australia to South East Asia for under USD$100. This is great for me, but the problem for the airline is foregone revenue. Before the coronavirus outbreak and slumping travel demand, that ticket would have sold for around USD$250.

Why Coronavirus Is Causing Airline Shares To Plummet In Value
Fewer passengers and cheaper tickets mean less revenue for airlines. Photo: Kevin Dooley via Wikimedia Commons.

As the discounting looks set to spread, it represents rich pickings for bargain hunters and bad news for the airlines. And that’s a trend that looks set not just to apply to potential passengers, but potential shareholders too.

Potentially rich pickings for bargain hunters

Already there’s chitchat on when the share market will bottom out and when’s the cheapest time to become the proud owner of a clutch of Delta shares. As they say, one man’s misfortune is another man’s opportunity.

While picking the bottom of the market, and in particular that of airline stocks, is a fraught business, one thing’s for sure, there’s money to be made if you get the timing right.

The strong, publicly listed airline companies may be taking a battering right now. But they are robust enough to survive this. As the weaker airlines inevitably go under or face consolidation, the strong airlines will come roaring back post coronavirus. As their businesses reboot, so too will their share prices. Until then, shareholders can just wince every evening when they check their closing prices.

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mohave

There are better alternatives for most air travel. Risking your life to gamble in Vegas by flying on a crowded airliner and is a bad bet. Videoconferencing can replace many business and professional trips. Airports are dangerous in a pandemic.