Airlines move to cut capacity and rein in costs as coronavirus effect intensifies

Moody’s Investors Service on Tuesday dialed down its outlook for the industry to negative from stable, saying that “the uncertainty and the speed of the outbreak will pressure airlines’ operating profits and cash generation for at least the first half of 2020.”

Delta DAL, +3.65% said it’s deferring $500 million of capital spending, delaying $500 million of pension funding and suspending share buybacks.

“Liquidity is strong and expected to be at least $5 billion at the end of the March quarter,” the company said. “In addition, Delta has approximately $20 billion of unencumbered assets, including $12 billion in aircraft.”

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United Airlines Holdings Inc. UAL, +11.84% withdrew its financial guidance for the first quarter but admitted it expects to book a loss. As recently as Jan. 21, when it reported fourth-quarter earnings, the airline was expecting per-share earnings of 75 cents to $1.25.

Southwest Airlines Co. Chief Executive Gary Kelly has agreed to a 10% pay cut, according to the Wall Street Journal. Southwest signaled it had identified a “severe recession” in the sector.

For MarketWatch’s full daily coronavirus coverage, see:Coronavirus update: 116,119 cases, 4,087 deaths; airlines cut capacity and some CEOs take pay cuts

“Given the weak travel demand, we are seriously considering reductions to our scheduled flying in the short term, and we will continue to monitor demand for necessary reductions thereafter,” Michelle Agnew, manager for media relations at Southwest, told MarketWatch.

Airline stocks have been hit hard as companies cancel nonessential travel and consumers steer clear of regions and countries that have had high numbers of cases of the virus-borne COVID-19 illness, which broke out in Wuhan, China, late last year. The virus has spread to 114 countries and created clusters of infection in Iran, South Korea and Italy.

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A decree put into place in Northern Italy this week has been extended to the entire country as the number of cases and deaths have soared in Italy. People there are now only allowed to travel for work or family emergencies.

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The S&P 500 airline subindex has fallen 30% in 2020, as investors have fretted about the history of large losses that has plagued the sector each time demand is abruptly halted. After the Sept. 11, 2001, terrorist attacks, for example, Congress was forced to approve a $15 billion bailout package for the industry.

Moody’s estimated an operating margin of less than 5% for 2020 for the aggregate of the airlines it rates, down from its pre-coronavirus expectation of about 9%. “Major unknowns,” such as uncertainty about the virus’s active period, its eventual geographic spread and the scale of infections in a given country or region, complicate efforts to arrive at financial-impact projections, the debt ratings agency said.

A “sharp decline in passenger demand” is expected to last through at least the second quarter. And while airlines will benefit from lower crude-oil prices, the extent of those savings will depend on how each company has hedged its fuel purchases. Any savings are unlikely to be enough to offset revenue declines, Moody’s said.

Moody’s is operating on the assumption that, based in part on the recovery from the 2003 SARS outbreak, the virus is likely a first-half 2020 problem and traffic should be close to pre-virus levels by the end of 2020.

“However, if the outbreak persists beyond the first half and/or the eventual recovery in the second half of the year is weaker than expected, the financial effect and credit risk for the airline sector would be greater,” the debt ratings agency said.

Australian carrier Qantas Airways Ltd. QAN, +7.22%QABSY, +11.28% has grounded half of its A380 fleet, cut overall capacity by 23% for the next six months, canceled a share-buyback program, and asked staff to take unpaid leave and dumped management bonuses late Monday.

A raft of other international airlines followed suit on Tuesday, including Air France-KLM AF, -1.93%AFLYY, +7.13% and Ryanair Holdings PLC RYA, +4.93%RYAAY, +7.94% alongside the major U.S. carriers.

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Air France released February traffic data, showing revenue passenger miles down 0.7% from a year ago, capacity up 2.3% and a load factor of 84.4%, which “looks pretty awesome considering that Virgin Atlantic has admitted that it is flying almost empty planes across the Atlantic in order to keep its Heathrow slots,” said Robert Stallard, analyst at Vertical Research Partners.

Norwegian Air Shuttle ASA NAS, +1.90% said it’s canceling 3,000 flights between mid-March and mid-June, cutting about 15% of total capacity for the period, due to coronavirus. The company is also taking other measures, including laying off workers, as a result of reduced demand due to the outbreak.

“We encourage authorities to immediately implement measures to imminently reduce the financial burden on airlines in order to protect crucial infrastructure and jobs,” said Jacob Schram, chief executive of the airline, in a statement.

Airline shares were mostly higher Tuesday, swept up in a broader market rebound from Monday’s carnage. The NYSE Arca Airline XAL, +5.73% was up 4.2%, but remains down 34% in the year to date, while the S&P 500 SPX, +3.97% has fallen 12% and the Dow Jones Industrial Average DJIA, +3.87% has fallen 14%.

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