“The world has changed for the airlines,” said Warren Buffett during the Berkshire’s virtual shareholder’s meeting on May 2. This statement highlights the grim scenario of the most-hit sector, airlines, during the coronavirus pandemic. In fact, since Feb 20, marking the beginning of the broader virus-related sell-off, the S&P (NYSE:SPY) Supercomposite Airlines Industry Index has plunged nearly 60% compared with the S&P 500 Index’s about 16% decline (per a Bloomberg article).
Berkshire has dumped $4 billion worth of its airline companies which include some major airlines like American Airlines (NASDAQ:AAL) Group Inc. AAL, United Airlines Holdings (NASDAQ:UAL) UAL, Delta Air Lines (NYSE:DAL) DAL and Southwest Airlines (NYSE:LUV) Co. LUV because of the coronavirus pandemic. Notably, as of December 2019, Buffett’s Berkshire held 42.5 million (10% stake) American Airlines shares, 58.9 million (9.2% stake) Delta shares, 51.3 million (10.1% stake) Southwest Airlines shares and 21.9 million (7.6% stake) United Airlines shares, per a CNBC article (read: 5 ETF Strategies to Follow Warren Buffett's Coronavirus Tips).
Consequently, shares of Delta, United Airlines and American Airlines declined more than 5% on May 4. In fact, plane manufacturer like The Boeing Company (NYSE:BA) BA lost 1.4% with jet-engine producer General Electric Company (NYSE:GE) GE losing around 4.5% on Monday following Buffett’s comments on the airline industry during the weekend
Coronavirus Impact on Airlines
The virus’ spread has resulted in declining air travel plans and travel restrictions imposed by the government. Consequently, the airlines’ top lines have suffered a material impact as passenger revenues form the largest component of their total revenue base. In fact, with the pandemic showing almost no signs of waning, air travel demand is likely to remain stressed, at least in the near term. In wake of such a gloomy scenario, Delta Air Lines warned that revenues in second-quarter 2020 (Apr-Jun period) are likely to decline 90% year over year.
Meanwhile, U.S. passenger airlines agreed in principle to a $25-billion rescue package under the Coronavirus Aid, Relief and Economic Security (CARES) Act per the U.S. Treasury Department on Apr 14. According to the deal, major carriers will receive 70% of the funds in cash that need not be paid back. But the rest 30% of the economic stimulus needs to be repaid. Also, United Airlines, JetBlue Airways (NASDAQ:JBLU) Corporation JBLU, American Airlines and Delta Air Lines have been observed to announce cuts to their international and domestic schedules, largely due to waning demand. Moreover, airlines have taken various cost-cutting measures like putting a freeze on hiring and deferring capital expenses to fight the pandemic.
However, assessing the hurdles for the sector, Barclays (LON:BARC) analyst Brandon Oglenski who downgraded the airlines group to neutral from positive has commented that “apart from not knowing when revenue will return for an industry collectively burning an estimated $20 billion of cash this quarter, sizable debt balances and yet unknown structural cost burdens loom large,” per a Bloomberg article.
Against this backdrop, investors can look at the following airline ETF that might be at risk:
U.S. Global Jets ETF JETS — down 57.21% year to date
The fund provides investors access to the global airline industry, including airline operators and manufacturers from all over the world. With AUM of $610 million, the fund holds a basket of 34 stocks. It trades in average volumes of about a million shares a day. It also has an expense ratio of 60 basis points. The fund carries a Zacks Rank of 3 (Hold), with a High-risk outlook (read: ETF Areas to Gain From Plunging Oil Prices).
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Southwest Airlines Co. (LUV): Free Stock Analysis Report
JetBlue Airways Corporation (JBLU): Free Stock Analysis Report
The Boeing Company (BA): Free Stock Analysis Report
Delta Air Lines, Inc. (DAL): Free Stock Analysis Report
General Electric Company (GE): Free Stock Analysis Report
United Airlines Holdings Inc (UAL): Free Stock Analysis Report
American Airlines Group Inc. (AAL): Free Stock Analysis Report
U.S. Global Jets ETF (JETS): ETF Research Reports
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