Federal Aid to End Soon: More Uncertainty for U.S. Airlines?

It is no longer news that stocks in the Airline industry have hitherto suffered a severe setback from the coronavirus pandemic, which resulted in a sharp contraction in air-travel demand. This gloomy scenario can be gauged from the International Air Transport Association’s (IATA) forecast that the aviation industry will lose $84.3 billion in the current year due to the coronavirus-induced crisis. The sharp drop in passenger revenues contributes to the IATA's depressing projection.

Payroll Support to the Rescue

To keep U.S. passenger airlines like Delta Air Lines DAL, United Airlines UAL, JetBlue Airways JBLU and Southwest Airlines LUV afloat during this ongoing unprecedented crisis, the Trump administration in April allotted $25 billion payroll grants under the Coronavirus Aid, Relief and Economic Security (CARES) Act.

However, the financial assistance, which offered the much-needed relief to airlines, came with certain conditions attached. For instance, airlines which received the aid were required to maintain a minimum level of service and not lay off any employee through Sep 30.

Airlines Warn of Job Cuts Post Sep 30

With the expiration of the federal aid inching closer, the airline industry is struggling for clarity as revival in demand does not seem a near-term possibility. In fact, many airlines already warned of job cuts post Sep 30 as they face the problem of overstaffing due to depressed revenues.

Per a CNBC report, United Airlines cautioned that it may have to furlough more pilots than the original plan of 2,250. Similarly, Delta intends to lay off 1,941 of its pilots if a suitable cost-cutting agreement is not reached with the concerned labor union in October. Moreover, management at the currently Zacks Rank #3 (Hold) American Airlines AAL announced that it will have to make approximately 19,000 of its employees redundant in October as air-travel demand remains suppressed. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Meanwhile, discount carrier Spirit Airlines SAVE reportedly inked a deal with its pilots’ union to avoid involuntary furloughs of roughly 600 of its pilots in October.

More Federal Relief in Store?

To avoid massive job losses, airline executives and labor unions are hoping for an extra federal stimulus package. Notably, U.S. airlines are seeking a six-month extension of the payroll support program. As a matter of fact, President Donald Trump and more than a dozen republican senators already lent support to the proposal of additional $25 billion federal aid for the airline industry. If the plan materializes, it will protect jobs through Mar 31, 2021.

Moreover, the cash-strapped U.S. airlines signed letters of intent pertaining to their share of the $25-billion federal loan under the CARES Act. Although the signing of the letters of intent does not mean that airlines are obligated to borrow loans, we expect them to avail of the same to bolster their liquidity position.

Quite logically, we expect investors interested in this once thriving space to stay tuned for further updates on the proposed financial incentive as prospects of layoffs loom large post the September deadline.

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Southwest Airlines Co. (LUV): Free Stock Analysis Report
JetBlue Airways Corporation (JBLU): Free Stock Analysis Report
Delta Air Lines, Inc. (DAL): Free Stock Analysis Report
United Airlines Holdings Inc (UAL): Free Stock Analysis Report
American Airlines Group Inc. (AAL): Free Stock Analysis Report
Spirit Airlines, Inc. (SAVE): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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