The entire travel industry, especially airlines, continues to struggle amid COVID-related concerns during Q3, analysts believe. Disney isn't reporting until November, but also in the spotlight after reorganization announcement.
If, like many of us, the answer is no, you’re probably part of the reason the airline and travel industry’s Q3 earnings prospects remain grounded.
Actually, “grounded” isn’t the best word for the results analysts expect from airlines. An expression that comes to mind, unfortunately, is “nose dive.”
Airline earnings are expected to plunge an incredible 313% year-over-year in Q3, according to research firm FactSet. That’s about the worst earnings projection for any industry sub-sector, dwarfing even projected losses in the lackluster Energy complex.
Travel isn’t all about the airlines, of course. Digging deeper into sub-sector performance, analysts see the Hotels, Restaurants, and Leisure sub-sector falling off a cliff, with earnings down 132% from a year ago.
All this is bad news for many non-airline travel companies—including Hilton (HLT), Marriott (MAR) and other big hotel chains, but one stands out. Walt Disney (DIS) recently announced it would lay off 28,000, many from its theme parks, as COVID troubles persist. Earlier this week, the house built by the mouse was back in the news, announcing a reorganization expected to give more priority to its streaming division.
While not every vacation is to the Magic Kingdom, problems for DIS often set the tone for the entire travel industry. Think of all those family holiday vacations people typically take—theme parks, waterparks, packed beaches, and cruises—that got canceled this year.
And that’s just the leisure side of travel. All the business meetings on Zoom (ZM) also could spell trouble for airlines and hotels.
There are some early indications things might improve later this year and next for some of the airline and cruise companies. At this point, though, Q3’s in the spotlight. and the raw numbers don’t look pretty. The number of passengers passing through Transportation Security Administration (TSA) checkpoints at the end of Q3 was about 30% the rate of a year earlier on a bad day, and 35% on a “good” day.
Whether that can tick higher depends not only on the course of COVID-19, but also on Washington. Both United Airlines (UAL) and American Airlines (AAL) have said they’d move forward with furloughs affecting a combined 32,000 employees. That could change if the White House and Congress act on an aid package for the industry, something that remains up in the air (pun intended) as this week moves along.
Airline earnings began their takeoff run Tuesday with Delta (DAL), and if DAL’s results—a worse-than-expected loss of $3.30 per share on revenue of $3.06 billion (versus year-ago revenue of $12.56 billion)—are reflective of the rest of the industry, there could be a lot more grief ahead (see chart below).
FIGURE 1: STUCK ON THE TAXIWAY. The Amex Airline Index (XAL—candlestick) is still down 45% year-to-date, not anywhere close to the S&P 500 Index (SPX—purple line), which is actually in positive territory for 2020. Data sources: NYSE American, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
In a press release, DAL’s CEO said the results “demonstrate the magnitude of the pandemic on our business,” but added, “We have been encouraged as more customers travel and we are seeing a path of progressive improvement in our revenues, financial results and daily cash burn.”
Thursday brings quarterly results from UAL, and next week is expected to bring AAL, Spirit (SAVE), Southwest (LUV), and Alaska Air (ALK). As for DIS, it’s a bit of a wait. They plan to announce fiscal Q4 results on Nov. 12.
Looking back to Q2, UAL lost more than $1.6 billion, compared with a $1.05 billion profit a year earlier. Revenue in Q2 dropped a stomach-churning 87% year over year. UAL announced progress last time out in reducing its daily cash burn, but it’s unclear how much more spending it can cut. This is one thing that might be in focus on tomorrow’s call.
Analysts expect UAL’s revenue to fall almost as sharply in Q3 amid losses of more than $7 a share.
Over at LUV, the industry’s troubles flared recently into a dispute between pilots and the company over a proposed 10% pay cut. The union called the proposal “dead on arrival,” media reports said, but it does put LUV’s nearly 50-year history of never furloughing an employee in the spotlight as earnings approach. Consider listening for more on that when LUV reports next week.
Investors might be writing off 2020 as a disaster for the airlines and beginning to look ahead to 2021 and beyond. Things do appear rosier a little farther out, but so much depends on whether a treatment or vaccine gets on the market to ease fears. No airline has any control over that.
One important thing to listen for on airline earnings calls this week and next is any information about future booking activity, said research firm Briefing.com. Generally, people want to travel. We heard that last week from cruise line Carnival (CCL), whose CEO said earlier this month they’re seeing activity for next year looking pretty good. What will the airlines say about their forward bookings?
A lot of travel companies are likely to repeat CCL’s assertion that they’re confident about next year, and 2020 is likely to be an outlier. Still, companies reporting across the travel industry are also likely to get the eagle eye from investors and analysts who want to see how they’ve been managing expenses in these hard times. The companies themselves will probably talk about efficiency efforts, and give the requisite disclaimer that the path to business activity ahead is tied largely to the virus.
If things unfold reasonably well on the virus front in 2021, that could mean leisure travel picking up before business travel, according to Briefing.com. Some of the more domestically-oriented airlines like SAVE, LUV, and JetBlue (JBLU) would be the likely beneficiaries of any pickup in leisure travel, as they’re less dependent on business travel than their larger peers.
Capacity is another topic of interest as the airlines report. Be on the watch for any big statements about how things have improved and remember to put them into context. If an airline tells you bookings are up 100% from Q2, let’s say, keep in mind that it could mean they’re now filling 40% of their seats instead of 20%. That’s definitely an improvement, but nowhere near where the airline would need to be for any kind of profitable operation.
Still, every incremental step of improvement could help validate the notion that we’ll keep seeing some sort of progression that bodes well for earnings out beyond 2021, Briefing.com noted. The firm expects 2021 to be better than 2020, and 2022 to be even better, provided we have a safe and effective treatment or vaccine.
Also, anyone considering trades in this sector should keep in mind that travel stocks—especially cruise lines—can move very quickly, sometimes going up 5% one day and falling 5% the next. It’s a roller coaster and you really have to stay on top of your positions.
Airlines are also an area where you probably need an iron stomach to ride out the volatility, but some analysts expect the sector to bounce back next year as pent-up travel demand gets unleashed. There’s no guarantee of that scenario, however, and airline stocks have generally leveled out but remain down about 45% year-to date, on average.
One thing people tend to like when flying is watching a movie on the plane. This year movies are more likely to be enjoyed from the comfort of the home.
Recently, Disney’s Pixar announced that their latest movie “Soul” will go straight to streaming. Recall that Regal Cinemas announced it would once again close its theaters as COVID-19 slows the rate of new releases from studios. If and when we get to the other side of the pandemic, many in the entertainment world are wondering what the “new normal” might look like.
DIS goes into earnings season with the two huge news developments about layoffs and reorganization under its belt. The reorganization announcement appeared to lift shares, but the stock remains well below pre-pandemic highs. Investors on the DIS call, still almost a month away, will probably want to get a sense of how quickly this reorganization can take effect, how DIS expects it to drive better efficiency and cost savings, and any management changes associated with it.
Along with that, any observations from DIS about how its streaming business is doing amid tough competition could be valuable.
The hotel business, like airlines, has struggled this year. However, one analyst upgraded both HLT and MAR this week. BMO Capital Markets analyst Ari Klein said “the backdrop remains challenging” for both companies, and “there remains a long and uneven road ahead.” However, he added, occupancy levels are well off the lows for HLT and MAR.
The real “inflection point in demand,” he said, is likely to take place in the second half of 2021 and into 2022.
That might be the tagline for the entire travel industry as we head into Q3 earnings. Although there’s likely an inflection point ahead, how much—and how quickly—demand returns is the big question mark.
It’s hard to deny that Q3 is shaping up to be an ugly-looking quarter for the travel industry. But stock prices aren’t derived from past earnings; they’re a reflection of future cash flows. Sure; past earnings can help guide expectations for the future, but the 2020 earnings picture—clouded by COVID-19—is arguably uncharted territory for those who offer transportation and shelter to the traveling public.
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