Shares of Alaska Airlines and Boeing plunged Thursday on growing fears that the coronavirus will hit the aviation business harder than most.
Alaska shares were down almost 8% and Boeing almost 6% on a day when the broad S&P 500 index fell 4.4%. All three major U.S. indexes are now down more than 10% from their recent highs.
The virus has already caused air travel to plummet in the Asia Pacific region, the world’s fastest growing aviation market. That previously has hit the stocks of the big network carriers that fly internationally, with Delta down 18% for the year, United 28% and American 29%.
But with uncertainty about how severely the virus might hit the U.S. — and corporate customers already paring domestic travel, as Microsoft did in withdrawing its employees from a mid-March game developers’ conference in San Francisco — investors have begun to offload shares of even domestic airlines such as Alaska. A secondary concern is that the network carriers will redeploy some of their large widebody jets to the domestic market, flooding transcontinental flights with extra seats that will lower prices.
Alaska spokeswoman Bobbie Egan said the airline is “carefully monitoring the situation” and handling passenger concerns over the virus and travel plans as they come in.
She said the company is consulting the Centers for Disease Control and Prevention (CDC), the Department of Transportation and the Federal Aviation Administration (FAA), and that University of Washington medical experts are also providing guidance.
Late Thursday, Alaska said it will suspend change and cancellation fees for new flight bookings through March 12 to give travelers flexibility through the uncertainties of the travel period ahead. Passengers who book before then and later decide not to travel because of concerns related to the virus will receive full travel credit to fly on another Alaska flight up to one year later.
“If you need to change your plans after booking a flight, we’ll work with you on new arrangements,” Andrew Harrison, Alaska’s chief commercial officer, wrote on the company blog.
After March 12, the airline will continue to assess the situation and adjust accordingly, said Egan.
JetBlue Airways said Wednesday it would stop charging ticket-change and -cancel fees through March 11 to give customers “some peace of mind” about their plans if the virus situation changes. Such measures are likely to help support ongoing sales as coronavirus dominates news headlines.
Investor concern also hit Boeing hard because, in addition to the air travel downturn, factory closures in Asia and transportation problems due to the virus could potentially hit its supply chain from Asia.
The coronavirus fears have accelerated this week, with U.S. airline shares on pace for the biggest five-day rout since March 2009, and two Wall Street analysts warned that the drubbing is poised to get worse.
Deutsche Bank’s Michael Linenberg cut his recommendation to hold from buy on six carriers, citing the rising risk that the outbreak “will disrupt travel patterns beyond China.” Daniel McKenzie of Buckingham Research said industry stocks could drop another 15% to 20% and “potentially more, depending on the severity of the economic fallout” from the virus.
“If the collapse in demand to Asia is a sign of things to come in other geographic entities, the stocks are not even close to discounting the potential demand fallout from a broader spread,” McKenzie said in a Thursday report. He downgraded seven U.S. airline stocks, including American Airlines and United Airlines, to hold from buy.
The sell-off reflects increasing fear that the coronavirus will upend U.S. airlines’ long profit bonanza over much of the last decade, which had followed a wave of industry consolidation. While the big carriers have already suspended flights to China, they have been banking on continued strength at home and in other overseas markets.
A Standard & Poor’s index of the five largest U.S. airlines tumbled — Delta, Southwest, United, American and Alaska — was already down 17% from a peak in early January, and it fell 4.2% on Thursday. In Europe, Air France-KLM, Deutsche Lufthansa and British Airways owner IAG also posted steep declines.
McKenzie said his downgrades were behind the curve, as Buckingham had mistakenly anticipated that the virus would be contained. Those hopes took a blow this week from warnings from the CDC others.
“Over the past two days, the CDC and other experts have warned that containment is unlikely, which creates a far more challenging demand picture,” McKenzie said.
If the collapse of demand in Asia extends to the more lucrative European and domestic markets, the industry may face a “financial crisis-type or 9/11-type demand and earnings shock,” he said. The possible return this year of Boeing’s grounded 737 MAX aircraft could add additional seats and potentially crimp airfares, further threatening airline profits.
Deutsche Bank’s Linenberg said he was concerned that the crisis will start to hurt peak travel periods such as spring break, Easter travel and early summer.
In addition, the growing number of corporate travel restrictions was “disconcerting,” he said, as business travelers tend to be “demand-inelastic and represent one of the industry’s most lucrative revenue streams.”
Information from Seattle Times aerospace reporter Dominic Gates and Bloomberg News is included in this report.