Aviation stock movements on the bourses were highly impressive on Sep 9, 2021. Evidently, the U.S. airline heavyweights like Delta Air Lines DAL, American Airlines AAL, United Airlines UAL, Alaska Air Group ALK and Southwest Airlines LUV gained 3.63%, 5.59%, 2.31%, 3.21% and 2.31%, respectively, on Thursday from Sep 8’s closing price. Driven by the gains of its key constituents, the NYSE ARCA Airline Index was up 2.62% to $92.23 at the close of yesterday’s trading session.
Shares rallied despite major airlines had issued a warning that the rapid spread of the highly contagious Delta variant of COVID-19 in the country is likely to dampen their September- quarter results. Through this write-up, we aim to unearth the reasons for this contradictory behavior. Let’s first take a look at the forecasts provided by various carriers.
In an Investor Update, Delta’s management stated that due to the rising COVID-19 cases in the second half of the third quarter, total adjusted revenues are likely to be at the lower end of its previous guidance. Previously, the metric was estimated to decline in the 30-35% band from the third-quarter 2019 levels.
Capacity is still expected to drop in the 28-30% range from the third-quarter 2019 actuals. Delta now expects non-fuel unit costs to increase roughly 15% in the September quarter (earlier guidance was an increase in the 11-14% range). Fuel price per gallon is now expected in the $1.96-$2 band (past view: $2.05-$2.15).
Due to the Delta variant-induced bookings and yield softness, United Airlines’ management now expects total revenues for the third quarter of 2021 to plunge approximately 33% from the third-quarter 2019 reading. To match the lower-demand scenario, the Chicago-based carrier is trimming capacity.
The airline currently anticipates its September-quarter capacity to be down at least 28% from the third-quarter 2019 actuals. This compares unfavorably with the previous guidance of 26% capacity contraction from the third-quarter 2019 levels.
Due to weakness in bookings, United Airlines, currently carrying a Zacks Rank #3 (Hold), now anticipates posting an adjusted pretax loss for the September quarter (against the earlier forecast was an $82-million adjusted pretax income). In fact, the carrier might incur an adjusted pretax loss in the December quarter as well if the current woes persist.
Low-cost carrier JetBlue Airways JBLU also trimmed its third-quarter capacity projection in response to tepid demand as bookings are softer than anticipated. JetBlue’s management now expects flown capacity to slip approximately 1% from the third-quarter 2019 actuals (earlier guidance wasto be either flat or decline up to 3%).
With the Delta variant inducing modest bookings and higher cancellations, revenues are now likely to decline in the 6-9% band (earlier guidance had called for a revenue decline in the 4-9% range). The September-quarter EBITDA is now expected in the $75-$125 million range narrowed from the earlier band of $75-$175 million.
Southwest Airlines’ management now expects third-quarter 2021 operating revenues to decrease in the 18-20% range from the third-quarter 2019 actuals (former view was a 15-20% decline). Due to this weakness, operating revenues for September are now expected to drop in the 25-30% band from the earlier expectation of a 15-25% decline compared with the third-quarter 2019 reading. Operating revenues for October are expected to decline between 20% and 30%.
Apart from the Delta-variant woes, Hurricane Ida disrupted operations. As a result, the company currently expects to cancel nearly 2,700 flights in the third quarter of 2021 due to which it slashes its September quarter capacity estimate by approximately one point from its previous forecast.
American Airlines expects third-quarter 2021 revenues to decline approximately 24-28% from the third-quarter 2019 finals (earlier guidance was an approximately 20% decline). Pretax margin, excluding net special items, is expected between a negative 10% and a negative 14% (previous guidance: between a negative 3% and a negative 7%).
Alaska Air now expects third-quarter 2021 revenues to fall approximately 19-21% from the third-quarter 2019 actuals (earlier guidance was a decline in the 17-20% band). Load factor (percentage of seats filled by passengers) is now expected in the 79-81% range down from the previous estimate in the 82-85% band.
Why Did Shares Rise?
As mentioned at the start of this writeup, the airline stocks gained yesterday despite the overall bearish outlook. We believe, this was due to the fact that the airlines were widely expected to issue unfavorable guidances due to Delta variant-led woes.
That the Delta-strain spread was hurting bookings and spurring cancellations are no secrets. So, the question of investors being taken aback by the projections does not arise. In fact, Southwest Airlines had warned of such a downbeat scenario last month only.
As the announcements widely matched the predictions of investors, they seem unperturbed. In fact, they appreciated the airlines’ clear stance on the likely adverse impact of the Delta-variant spread on their third-quarter results.
Moreover, prior to the Delta-variant spread, air-travel demand in the United States was improving. So, the current set of bearish views might also suggest that the recovery strategies the airlines adopted before the Delta variant saw an upsurge, were working. This is encouraging for long-term investors who may think that these calculated actions will pay off again, once the Delta-mutant woes subside.
Evidently, JetBlue expects leisure demand for the peak holiday air travel to "hold up relatively well." Delta Air Lines' management stated that booking trends stabilized over the last 10 days and the improvement from the Delta variant-led lows are likely to be visible as soon as the number of cases start declining.
Increased vaccination is likely to be the ideal solution as the Delta variant spread mostly in the less-vaccinated areas of the country.
The FDA’s recent decision to grant a full approval to Pfizer PFE/BioNTech’s BNTX coronavirus vaccine for individuals aged 16 years and above is likely to increase the frequency of immunization programs in the United States. The full nod is likely to instill the trust of the Americans in the safety and efficacy of the jabs.
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