The travel industry is taking a beating these days. Between stay-at-home orders and tight travel restrictions, investors aren't interested in cruise lines or airlines, and it shows. Cruise line operators have been the hardest hit. Shares of Carnival and Royal Caribbean have plummeted between 73% and 81% this year. Airline stocks are holding up better, but the victory is only relative.
As airport traffic continues to recover, airline stocks are popping back up again on investors' radars. The narratives driving strength into the airline industry is compelling. We could point the finger at multiple developments, but it has to do with the news of the vaccine for COVID-19. Hopes for a quick end to this pandemic has turned into a reality. And the reported effectiveness rate of the pair of vaccines announced is exceeding even the most optimistic projections.
Is Traffic Sustainable?
Despite the rebound in stocks, restaurants are still operating at limited capacities. Travel is still down, and the labor market has still not recovered. And the United States has now seen back-to-back days of record COVID-19 case numbers. According to The New York Times, 103,657 new cases were reported on November 8th, with an average of 111,175 cases a day over the past week. This will ultimately harm airline traffic. Yet, the figures have been improving. In mid-October, TSA logged its first day of 1 million passengers since the pandemic began. So, the question becomes this: how sustainable is that traffic growth? And with so many new cases, how long will it take for things to get back to normal?
Almost a week before that strong TSA figure, the company reported earnings. Since then, shares have been relatively flat, down just 8%. For the numbers investors have seen this year, that's a pretty good performance from the stock. Additionally, the company reported a loss of $3.30 per share or $2.6 billion. Naturally, the year-over-year comparisons are devastating, to no surprise. On the flip side, though, the company is improving notably from the prior quarter. Investors need to continue seeing that improvement if the stock hopes to gain any traction again.
Adjusted Revenue Decline -91%-79%
Adjusted Loss $3.9 billion and $2.6 billion
Capacity Reduction 85% and 63%
Average Cash Burn $43 million and $24 million
Cash Burn in Last Month of QTR.$27 million and $18 million
Liquidity $15.7 billion and $21.6 billion
Almost every major airline has been hit hard by the COVID-19 pandemic this year. But in the U.S., industry laggard American Airlines has struggled more than its rivals due to high interest and lease costs and strategic missteps. American's third-quarter earnings report revealed that the carrier's underperformance is continuing—and that's bad news for investors.
American Airlines restored capacity faster than rivals Delta Air Lines and United Airlines this summer. That represented a risky bet on pent-up demand driving a significant sequential improvement in domestic air travel during the traditional vacation season. Unfortunately for American and its shareholders, the market has recovered from April at a very modest pace. Daily cash burn averaged $44 million a day during the third quarter. This was even worse than what American Airlines' guidance had implied.
A Mixed Outlook
This cash-burn figure was worse than what Delta and United reported, too. Excluding severance and debt-principal repayments, Americans burned $36 million a day last quarter, compared to $24 million a day for Delta and $21 million a day for United. American Airlines' outlook for the fourth quarter was also somewhat disappointing. The company expects daily cash burn to average $25 million to $30 million, with $8 million of that daily cash burn from severance and debt-principal payments. It's worse than the scenario Delta laid out, which calls for daily cash burn (excluding severance and principal debt payments) to slow from $18 million last month to around $10 million by December.
Drowning in Debt
American Airlines ended last quarter with $13.6 billion of liquidity, including $8.3 billion of unrestricted cash and short-term investments. Thus, it faces no immediate bankruptcy risk. However, it also had $47.5 billion of debt, lease, and pension liabilities as of September 30th. That figure is likely to exceed $50 billion by early next year, as American draws on subsidized secured loans available from the federal government.
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Carnival Cruise Line
Entire cruise-line fleets sit empty and forlorn. They are docked or moored without a passenger on board. In the U.S., cruise liners linger under a No Sail Order from the Centers for Disease Control. Formerly grand vacation vessels have morphed into virtual ghost ships. Carnival stock sinks to a low 7 for its Earnings Per Share Rating. The 7 Rating is terrible but not surprising, given the coronavirus pandemic's impact on vacation cruising. It means that Carnival's earnings per share growth have outperformed just 7% of all publicly traded companies in payments.
Stocks with EPS Ratings of 80 or better have the best chance of success. Remember, too; the company could rack up huge losses in 2020. Carnival is scheduled to release its next quarterly earnings announcement on Friday, December 18th, 2020. The outlook for a resumption of cruising is weak. Carnival-owned Costa is still cruising, but other Carnival-owned lines are dead in the water.
Royal Caribbean Cruise Line
Shares of Royal Caribbean have nearly quadrupled in value from their March lows. Still, they remain 45% below where they started 2020, as the corona-virus pandemic has canceled all cruise ship activity virtually until next year. Royal is burning through cash. Last quarter it reported generating just $32 million in revenue, down from $2.3 billion a year ago. While this revenue drop is not surprising since its ships were stuck in port, losses continue to mount. Even if it does return to a more normal cruise schedule next year, analysts suspect it will be several years before it's operating at pre-pandemic levels.
The cruise ship operator reported losing $1.3 billion for the period, which followed a $1.6 billion loss in the second quarter and a $1.4 billion loss in the first. It confirmed its monthly cash burn has been between $250 million and $290 million during the shutdown, and it won't be able to relieve the pressure on that rate until it can sail again. However, Royal Caribbean did shore up its liquidity during the crisis. While it added to the total debt it will be carrying on the books—a massive $17.6 billion in long-term debt plus $870 million due within a year—Royal Caribbean has $3 billion in cash and $700 million in short-term loan commitments.
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