The stock market moved lower on Friday morning, with sentiment among investors taking a hit from ongoing nervousness about the reopening of the U.S. economy. Even as people start to return to work and businesses ramp their operations back up, there’s an increasing recognition that getting back to business as usual won’t be a reasonable expectation in the immediate future. Just after 11 a.m. EDT, the Dow Jones Industrial Average (DJINDICES:^DJI) was down 140 points to 24,334. The S&P 500 (SNPINDEX:^GSPC) lost 12 points to 2,937, and the Nasdaq Composite (NASDAQINDEX:^IXIC) fell 27 points to 9,258.
One industry that has a big task ahead of it is the airline business. Even amid signs that passengers might finally start to fly again, shareholders in key industry players like Delta Air Lines (NYSE:DAL), Southwest Airlines (NYSE:LUV), American Airlines Group (NASDAQ:AAL), and United Airlines Holdings (NASDAQ:UAL) aren’t convinced that the worst is over for their respective companies.
Signs of a travel rebound
Ever since local shutdowns went into effect, airline travel volumes have plunged. Already, Delta, American, Southwest, and United have reduced their domestic flight schedules by roughly 70% to 90%, reflecting the huge reduction in the number of passengers taking to the skies. On April 14, the Transportation Security Administration reported just over 87,500 passengers went through its airport security checkpoints, down more than 96% from the 2.21 million travelers on the same day in 2019.
However, traffic levels are starting to rebound. On May 21, almost 318,500 travelers went through TSA checkpoints. That was still down 88% from where traffic was a year ago, but it was up by more than two-thirds from its level just two days before and the best day for air travel since March 23.
Even with the gains, though, airline shareholders didn’t celebrate. Stocks in the sector were down 2% to 3% Friday morning despite the traffic news.
What tomorrow’s airlines will look like
The apparent disconnect between the positive news and the way that investors interpreted it makes sense when you consider some of the longer-term ramifications for the airline industry. Even as more passengers start traveling by air again, air travel in the future could look a lot different from the business model that’s been so profitable for airlines over the past decade.
Consider some of the things that airlines are going to have to do:
- Safety measures will prevent airlines from packing passengers into ever-tighter spaces, instead requiring empty seats or new configurations to address health concerns.
- Airlines have historically relied on business travelers for a large part of their profitability. However, corporate moves to enhance remote communication capabilities during the coronavirus pandemic might well stay in place even after travel becomes easier, especially as hard-hit businesses seek to recoup financial losses from the shutdowns. That will mean fewer business travelers in the air, hurting airlines disproportionately.
- Added responsibilities for cleaning and disinfecting aircraft and airport facilities will add to costs for airlines, even as recessionary economic conditions could make it difficult or impossible to pass through extra expenses to passengers through higher fares.
Already, some airlines have made big moves to reduce their size. Delta said it would retire its entire fleet of 777 aircraft, expecting much less demand for flights requiring the jet model. Other airlines are looking at similar moves, canceling new aircraft orders and taking steps to be more fiscally conservative.
Add to that the conditions of the government assistance they’ve received, and it makes sense that airline stocks might not regain their lost glory even if air travel bounces back. Whether the ongoing challenges result in a major airline bankruptcy or merely further weakness, investors should be aware of the added risks involved with airline stocks right now.