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Airlines Flying Into Earnings Pain As Travel Demand Remains Weak

After suffering a devastating blow in the first quarter, investors in airline stocks were hoping business to take off again, as the US economy began to gradually open up after the COVID-19 outbreak.

But the second-quarter earnings announced this week show that the path to recovery will be fraught for US airlines. Below, we summarise the most recent results for the three largest carriers and what their executives have to say about the future.

1. American Airlines

American Airlines (NYSE:AAL) yesterday reported a loss of $2.1 billion in Q2, compared with a profit of $662 million during the same period a year ago. Excluding one-off items, such as government aid to cover payroll, the airline reported a loss of $3.4 billion, or $7.82 a share, compared with the $4.86 consensus among analysts.

During the earnings call, executives at American said bookings have started to fall again and business travel, which usually picks up after Labor Day, shows no signs of resuming. “In short, the crisis continues,” Chief Executive Doug Parker said on a call.

American’s net bookings, or the difference between new reservations and cancellations, are down 75% to 80%, a considerable decline from May and June, when Sunbelt states were opening up and some business travelers were returning to the skies. At one point, net bookings in those states were down just 35% to 40%.

American shares more than doubled in value between April and June. But since the June peak, they have lost around 50%, to trade at $11.97 a share on Thursday.

Despite this gloomy picture, there are some positive signs in American’s latest report. Revenue-per-passenger-flown a mile was six times higher in June than in April. At the same time, the airline reduced the rate at which it was burning through cash from $100 million a day in April, to $30 million at the end of June.

American said it expects third-quarter capacity to be down 60% from last year. The carrier told pilots in a memo this week to prepare for schedule adjustments.

American Airlines Shares

American Airlines Shares

2. Delta Air

Delta Air Lines (NYSE:DAL) reported a net loss of $5.7 billion for the quarter to June, compared with a profit of $1.4 billion a year earlier. Sales during the period were down 88% to $1.47 billion. Adjusted for one-off charges, Delta lost $2.8 billion. The $4.43 loss per share compared with the $4.16 consensus among analysts polled by FactSet.

Delta ended the quarter with $15.7 billion in liquidity, which it said was enough to sustain operations for 19 months. This includes $5.4 billion in government aid to pay wages. The company has yet to decide whether to take up an additional $4.6 billion federal loan.

Delta’s shares were up more than 2% on Thursday to trade at $26.09 in afternoon trading, but are still down by more than 50% for the year.

Chief Executive Ed Bastian echoed the words of American’s Parker and said the recovery from April’s near-collapse in domestic flying had stalled. As a result, Delta will halve the number of extra flights it adds in August to 500, and capacity in the third quarter will be, at best, 25% of what is was a year ago.

Bastian said on an investor call Tuesday he didn’t expect the level of business flying to ever recover to its pre-pandemic levels, as companies refocus on essential travel. Analysts estimate premium fliers account for half of Delta’s sales, the highest in the industry.

Delta also continues to limit capacity to 60% on its flights to ensure an empty middle seat.

The pause in the demand recovery would leave Delta burning $27 million in cash a day this month, in line with last month.

The carrier expects its schedule for the rest of the year to look similar to August, warning that any recovery in air travel will not “follow a linear path.”

Delta Air Lines

Delta Air Lines

3. Southwest

Southwest Airlines (NYSE:LUV) reported a $915-million loss in the second quarter, compared with $741 million in net income a year earlier. Like its competitors, it warned demand won’t pick up any time soon.

Southwest reported sales dropped nearly 83% to about $1 billion from $5.9 billion last year, though sales in the quarter were higher than analysts’ estimates. The per-share loss of $2.67 on an adjusted basis was roughly in line with analysts’ forecasts.

Southwest estimated its third-quarter capacity will fall between 20% and 30% compared with last year.

CEO Gary Kelly said in an earnings release:

“We were encouraged by improvements in May and June leisure passenger traffic trends.”

“However, the improving trends in revenue and bookings have recently stalled in July with the rise in COVID-19 cases.”

Southwest shares have not been punished as badly as its two rivals. Its stock is down 39% this year, to trade at $32.88 on Thursday, showing a 1% drop on the day.

Southwest Airlines

Southwest Airlines

Bottom Line

These earnings reports show America’s biggest airline stocks are unlikely to recover unless there is a vaccine to tackle the spread of COVID-19. Though airline executives have little positive news to share at a time when people aren’t ready to travel, these beaten-down stocks could prove a good bet for investors with a little patience.

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