The Airlines' Conundrum
By Matt Salm, Investment Analyst
Airlines have been one of the industries hardest hit by the ongoing coronavirus pandemic. A cursory glance at stock prices from prominent U.S. airlines tells a harrowing tale: since the stock market peaked in February, American Airlines’ stock is down 46%; United’s shares are down 53%; Delta’s share price has fallen 49%; and Southwest Airlines, which has fared the best of the major carriers, has still experienced a 39% fall in value. Seeing a potential bargain, millennials have recently poured huge sums into airline stocks and ETFs. Whether or not this is a smart move remains to be seen.
In April, as much of the United States implemented a variation of stay-at-home orders, Delta only filled 5% of the seats it normally fills, which crushed revenues. How can airline companies start to refill these seats and reduce further revenue losses?
On the surface it seems obvious that the best way to boost airline revenues is by reopening the economy, resuming travel for business and leisure, and packing planes full of people so that companies can make as much money per flight as possible… Right?
Well, not so fast. What I just described might work well for airlines once the pandemic is over. But while the pandemic is ongoing, airlines face a conundrum. Packing planes full of people makes social distancing impossible and could increase the spread of COVID-19. That will likely delay economic reopening, thus further hurting airlines’ revenues.
So what can these companies do? They need to sell tickets, but they need to make flying safe. In a recent interview with Bloomberg, Delta’s CEO Ed Bastian outlined a number of new hygiene and sanitation procedures, including installing new air filters and requiring all travelers to wear masks. Perhaps the most interesting – and significant – step Delta has taken is to stop selling tickets for all middle seats on their flights. So no matter where someone is sitting on a Delta flight, they won’t be sitting next to anyone else.
Will these new measures make air travel safe and profitable? Only time will tell. While I don’t plan on flying anytime soon, at least I know I won’t be stuck in the dreaded middle seat if I do hop on a Delta flight in the near future.