Airline and travel stocks feel the impact of coronavirus

ASX-listed airline and travel stocks have taken a pummelling as tightening travel restrictions due to the coronavirus pandemic severely impact demand.

Airlines around the globe have been slashing flight capacity with Virgin Australia Holdings (ASX: VAH) being the latest to announce plans to suspend all international flights until mid-June and cut domestic flight capacity in half.

It follows Tuesday’s announcement that Qantas Airways (ASX: QAN) will cut international flights by around 90% until at least the end of May.

The uncertainty of COVID-19’s continued spread and full impact also has earnings guidances on hold and investors on edge with many travel-related stocks losing half of their value over the past month.

Hundreds of planes grounded as demand falls

Virgin Australia today revealed it will suspend all international flights from 30 March to 14 June and reduce domestic capacity by 50% until 14 June.

In addition, 53 aircraft have been temporarily grounded from the Virgin fleet.

“We have entered an unprecedented time in the global aviation industry, which has required us to take significant action to responsibly manage our business while balancing traveller demands and supporting the wellbeing of Australians,” Virgin Australia chief executive officer and managing director Paul Scurrah said in a statement.

“We have responded by making tough decisions which include reducing our domestic capacity and phasing in the temporary suspension of international flying for a period of two and a half months,” he added.

Qantas’ plans to cut 90% of international capacity until the end of May (at a minimum) is up from its 23% reduction for the FY 2020 fourth quarter announced last week.

In addition, the airline said it will reduce domestic capacity by about 60% over the same period.

These large-scale reductions are equivalent to the grounding of around 150 aircraft, including almost all of Qantas’ wide-body fleet, the company stated.

Likewise, Air New Zealand (ASX: AIZ) this week announced it will cut its long-haul (international) capacity by 85% “over the coming months” and will operate a minimal schedule to allow New Zealanders to return home and “to keep trade corridors with Asia and North America open”.

Domestic flights will also be reduced by around 30% in April and May, the airline stated.

The company went into suspension Wednesday morning pending a release on the financial and operational impact of the travel restrictions.

According to Qantas, international travel demand has been impacted by the “severe quarantine requirements on people’s ability to travel overseas”.

In Australia, Prime Minister Scott Morrison announced on Sunday that all travellers entering the country will now be required to self-isolate for 14 days. Each state and territory differ in how they are enforcing this rule, with Western Australians facing the harshest punishment of a $50,000 fine or up to 12 months of imprisonment.

Addressing the nation on Wednesday, he upgraded the travel ban to level 4 for the entire world for the first time in Australia’s history, advising Australians to not travel abroad at all.

The stern advice comes as the country’s tally of confirmed COVID-19 cases climbed to more than 450 people.

European Union member nations on Tuesday agreed to close external borders to most people from other countries for at least 30 days.

In the rest of the world, some countries are enforcing the 14-day quarantine rule, while others are banning entry to travellers coming from certain countries such as China, Iran, Italy and the UK.

Meanwhile, the Australian government has advised against non-essential travel and gatherings of more than 100 people, with Qantas stating a rapid decline in domestic travel demand was due to corporate travel restrictions and a “general pullback from everyday activities across the community”.

Labour surplus issues and pay cuts

Air New Zealand on Monday said it will need to “start the process of redundancies for permanent positions” as a result of the travel downturn, while Qantas said it was trying to manage the impact on its own jobs “as much as possible” including through the use of paid and unpaid leave.

“The precipitous decline in demand and resulting cuts to flying mean that the Qantas Group is confronted with a significant labour surplus across its operations. Travel demand is unlikely to rebound for weeks or possibly months and the impact of this will be felt across the entire workforce of 30,000 people,” Qantas stated.

It previously announced “three months of no pay” for chief executive officer Alan Joyce and chairman Richard Goyder, as well as “significant pay cuts” for group executive management and board members, and cancelling of annual bonuses and an off-market buy back.

Virgin has revealed similar cost reduction measures including a temporary 15% cut in chairman and independent board director fees, and the removal of management bonuses and other incentives including pay rises.

The airline said it is suspending its earning guidance “due to uncertainty and the evolving nature of the COVID-19 situation”, although it shared a research report by S&P Global on Tuesday that lowered its issuer credit rating due to the deteriorating market conditions.

“We believe Virgin Australia’s concerted efforts to further reduce capacity, exit loss-making routes, as well as accelerate cost reduction and fleet simplification initiatives – while appropriate – are unlikely to fully offset the cash flow impact of reducing travel demand,” the report stated.

Of the airline stocks, Qantas has been hit the hardest, with shares down 28% over the past week and 54% over the month.

Virgin’s stock has fallen 8.7% in the last week and 51% over the month, while Air New Zealand has lost 9.7% of its value in the last seven days or 41% compared to a month ago.

Other travel stocks on the decline

Other travel-related stocks are also feeling the impact of coronavirus, with Flight Centre Travel Group (ASX: FLT) last week suspending its earning guidance for the 2020 fiscal year “in light of heightened coronavirus uncertainty”.

The travel agency previously downgraded its full year guidance from an underlying profit before tax of between $310-$350 million to $240-$300 million.

Flight Centre managing director Graham Turner said the company would draw on its experiences with the 2003 SARS outbreak and the 2009 Global Financial Crisis by “seeking to stimulate demand, while also implementing sensible cost reduction strategies to maintain its balance sheet strength”.

But investors are not so confident with stocks rapidly plummeting to 10-year lows, reflecting a 34% decline in the last week and 60% over the month.

Business travel agency Corporate Travel Management (ASX: CTD) announced the suspension of its earnings guidance and actioned cost-cutting plans including shorter working weeks on proportionate pay and leave without pay, a freeze on non-essential recruitment and cuts on discretionary spending.

It also said managing director Jonathan Nelson and non-executive directors will take a 20% cut in their fees and fixed renumeration for the remainder of the financial year.

Sydney Airport (ASX: SYD) has lost about 25% of its share value in the last week after reporting a 16.8% drop in international traffic for the month of February, while domestic traffic fell 4.5%.

“Like our airline partners, we are also experiencing the financial impacts of coronavirus. There is a direct link between passenger arrivals and departures and our aeronautical revenues, so we share the pain of every flight cancellation,” Sydney Airport chief executive officer Geoff Culbert said.

Domestic airline service Regional Express Holdings (ASX: REX) went into a trading halt on Tuesday and recently reported a less than favourable half yearly result.

Shares in the domestic airliner are down over 42% in the past six months.

Fly-in, fly-out air charter operator Alliance Aviation Services (ASX: AQZ) is yet to announce any changes to its business activity as a result of the coronavirus outbreak, although its share price has plunged by more than half in the last month, in line with other aviation stocks.

South Australia-based bus and ferry operator Sealink Travel Group (ASX: SLK) has also lost more than 20% of its value in the last month and said it expected the combined impact of the recent bushfires and coronavirus to result in a $5 million reduction on second half EBITDA.

However, the company assured investors that it was “taking mitigating actions to offset negatives” across its marine and tourism business.

“China represents less than 4% of tourism revenue and now less than 1% of total group revenue (including Transit Systems Group),” the company stated in a February presentation.

Sealink also recently announced the retainment of four South Australian bus contracts and the award of additional contracts.