Airline 2020 profits May drop 27% on blow from virus, Cowen says

The airline sector is at the frontline of the coronavirus crisis as financial markets struggle to make sense of the outbreak’s impact, and Cowen expects the group’s profit for the year to take a substantial hit.

“The coronavirus has sent a shockwave through the booking curve with corporate and leisure canceling trips or hesitant to purchase new tickets,” Cowen analyst Helane Becker wrote in a note on Friday. She lowered 2020 earnings estimates for the sector by 27%, and by 12% for 2021.

U.S. airline stocks have plunged over the past couple weeks as virus-related worries intensified, cancellations stacked up and travel restrictions tightened. The S&P Supercomposite Airlines Industry Index is down 28% since Feb. 19, while the S&P 500 Index has fallen 11% over the same period. The biggest decliners on the airlines index include American Airlines Group Inc., Hawaiian Holdings Inc., United Airlines Holdings Inc. and JetBlue Airways Corp.

“We do not believe these shares will move higher until there is a decline in new virus cases,” Becker said. While the second quarter will be the low point for earnings this year, that assumes leisure travelers deciding to take their summer vacations. But if they decide to “stay home and spend more time at the golf course, tennis courts or swim club,then we’d say third quarter will be the nadir.”

The largest cut to estimates were at American, Delta Airlines Co. and United, citing their international networks and reliance on corporate travelers. The analyst expects corporate travel demand will decline about 30% in April, 20% in May and 10% in June. “After June we expect a relatively normal booking curve but obviously time will tell how trends actually play out.”

The estimate for American’s 2020 profit is now $2.75 from an earlier estimate of $5.10. Delta is down to $5.90 from $7.30, and United to $7.15 from 12.10.

While the situation is currently “incredibly fluid,” Cowen’s base case assumes March and April to be the worst months in terms of declines and to show sequential improvement in May and June, and that demand will be worse than the capacity declines by airlines.

Despite the doom and gloom, Becker does not at this time foresee the coronavirus impact triggering a bankruptcy scenario for the U.S. airlines. Becker noted that many of the airlines have large amounts of unencumbered assets to tap if needed, and continue to have access to the financial markets.