Airlines Q4 Earnings Signal Recovery: Will This Optimism Stay?

The fourth-quarter 2020 earnings season is almost over for stocks in the airline space. Only a few Latin American carriers like Azul AZUL and Gol Linhas GOL are yet to report financial numbers. Agreed that the airlines, which already reported earnings, incurred losses in the December quarter akin to the other quarters of the coronavirus-ravaged 2020 but the magnitude of that loss compared favorably with the loss suffered in the September quarter.

The price performance of the Zacks Airline industry in the final quarter of 2020 highlights the betterment of the scenario. In the three-month period from October to December, the industry gained 26.9%, above the S&P 500 Index’s 11.6% appreciation.

Revisiting Q4 & Reasons for Improvement

Delta Air Lines DAL kicked off the fourth-quarter 2020 earnings season for the aviation industry on Jan 14. Although this Atlanta-GA based company incurred a loss (excluding $1.34 from non-recurring items) of $2.53 per share in the December quarter, wider than the Zack Consensus Estimate, the same was narrower than the loss of $3.30 reported sequentially.

This upside was mainly owing to the lower year-over-year reduction in passenger revenues (which contribute to the bulk of the top line) in the fourth quarter as demand for leisure travel improved with the holiday season falling during the period. Notably, passenger revenues at Delta plunged 74% year over year to $2,698 million in the fourth quarter, better than the mammoth 83% slump to $1,938 million witnessed in the third quarter. 

The story was similar for United Airlines UAL, which reported fourth-quarter loss of $7 per share, wider than the Zacks Consensus Estimate of a loss of $6.56. However, the same compared favorably with the third-quarter loss of $8.16 per share. Akin to Delta, the year-over-year fall in passenger revenues (down 75.7% to $2,410 million) at United Airlines during the December quarter was less than the massive 84.3% plummet in the metric (to $1,649 million) witnessed in the third quarter.

American AirlinesAAL fourth-quarter performance was even better as its loss per share not only lessened sequentially but also was narrower than expected. Moreover, this Fort Worth, TX-based carrier, currently carrying a Zacks Rank #3 (Hold), outperformed on the revenue front in the December quarter with passenger revenues coming in at $3,190 million, higher than $2,540 million reported in the third quarter. The fourth-quarter loss per share of other major carriers like Alaska Air Group ALK and Southwest Airlines LUV too compared favorably with the loss incurred in the previous quarter.

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Apart from the improvement in passenger revenues, cargo revenues showed an uptick at many carriers, which focused on their cargo division to combat the coronavirus-induced year-over-year weakness in air-travel demand. For example, cargo revenues soared 77.2% year over year to $560 million in the December quarter at United Airlines. Similarly, fourth-quarter cargo revenues at American Airlines surged 32% to $285 million with cargo yield per ton mile escalating 82.2%.

Improvement in the cash burn scenario was also witnessed in the fourth-quarter results of the airlines. Notably, driven by its cost-control initiatives, American Airlines’ average daily cash burn in the December quarter was $30 million per day, comparing favorably with the September-quarter’s figure of $44 million. In fact, aided by its cost-saving efforts, the carrier significantly reduced its cash burn rate from nearly $100 million in April 2020 to the current level. At Delta, the daily cash burn halved to $12 million (on average) in the final quarter of 2020 from $24 million in the third quarter.

Moderate fuel costs also bumped up the bottom line of carriers in the final quarter of 2020.

The Path Ahead

The million-dollar question now is whether the airlines will be able to carry forward the momentum gained from the much-improved results for the four quarter. However, with the pandemic resurging through new variants that reimposed lockdowns in the UK as well as across some other countries in the EU, things might not seem upbeat for the near future.

On the flip side, there are some encouraging signs. Let’s delve deeper to unearth those. The greatest source of optimism this year is the availability of vaccines to combat the coronavirus. While the immunization programs started around the globe, we expect more vaccines to be available in the market as the year progresses. The above development should prop up the airline companies, which are pinning hopes on the people’s return to air travel after getting the vaccine jabs. This, in turn, should boost the passenger revenues.

Notably, the recovery in air-travel demand (particularly on the leisure front) can be gauged from Southwest Airlines management’s recent commentary that demand and bookings for February are showing an uptrend. As a result of this uptick in demand, the carrier anticipates its cash burn to improve in the first quarter of 2021 from its initial expectations.

Another positive factor for the airlines is that more federal stimulus might be available shortly as part of the proposed $1.9 trillion bill. Notably, the current federal aid protects airline jobs through Mar 31, 2021.

In fact, the International Air Transport Association (IATA) too expects the scenario to brighten up for the airlines in the current year against last year’s gloomy environment. Notably, IATA’s baseline forecast for 2021 projects traffic to recover to 50.6% of the 2019 levels.

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