Southwest Airlines (NYSE:LUV) will post its first-quarter earnings on April 28, 2020. Considering the circumstances, it’s likely that “better than expected” will have to be good enough. In advance of the earnings report, LUV stock is not dropping significantly. The bad news? The stock continues to fall.
The bleak reality that is setting in for all airlines is that any recovery in air traffic may be a long way off. Investors are trying to understand what a world after the novel coronavirus will look like. And increasingly they are wondering how prominent air travel will be in that new world.
The Coronavirus Continues to Confound Experts
On April 26, Dr. Deborah Birx, the White House Coronavirus Task Force coordinator, said social distancing measures will likely remain in place through the summer. Repeating comments that are being heard throughout the medical community, Birx said the key to relaxing the current social restrictions is a better understanding of the extent of the virus’ spread.
However, even that “conventional wisdom” is being challenged by the World Health Organization (WHO) that issued a warning of its own the day prior to Dr. Birx’s remarks. The WHO says that there is not enough evidence to confirm that someone who recovered from Covid-19 has developed immunity. This is in contrast to those who argue that “herd immunity” is essential to beating back the pandemic.
Neither of these developments are particularly “new” news for investors who are looking at airline stocks. But they do serve as a reminder that while the economy may come roaring back, airlines may be late to that party.
Airlines Face a Paradigm Shift
The airlines can take steps to adhere to social distancing guidelines. But ultimately how they do is just logistics. The airlines face a fundamental threat on two fronts.
First, they need to overcome consumer fear. Like cruise ships, airlines will face an enormous burden of proof. They will have to alleviate consumer fears that they will be infected by sharing air with other passengers. Yes, many passengers say they will come back. But will they?
Nobody can say for sure what additional mandatory measures will be put in place to ensure (as much as possible) the health of other passengers and crew. But you can imagine it will be more invasive than removing your shoes. It’s hard to say how much inconvenience consumers will be willing to bear.
Second, airlines will face a new paradigm. There’s a saying in sports “never let them see your backup.” Unfortunately for the airlines, the pandemic is forcing businesses to apply virtual solutions to handle situations that previously meant putting employees on planes.
I’m not suggesting there will not be business travel in a post-virus economy. But whenever our economy goes through a disruptive event, it comes back, but not in the same way. There will be changes.
Low Traffic May Get Lower
An article in Forbes on April 26 cites the plight of flight attendants in the ongoing coronavirus pandemic. Sara Nelson, president of the Association of Flight Attendants – CWA says at least 250 flight attendants have tested positive for the coronavirus. According to Nelson, many flight attendants are rightfully concerned that they could be actively spreading the virus.
With that in mind, Nelson has appealed to the U.S. Department of Transportation and the Department of Health and Human Services to “end all leisure travel until the virus is contained.” This is not the first time flight attendants have made this request. However, this letter is asking the government to take more extreme steps to protect flight attendants.
You Could Buy LUV Stock, But Why Would You?
As my InvestorPlace colleague Josh Enomoto wrote recently going over analysts’ expectations for LUV stock is almost pointless. Between sheltering in place policies and an immeasurable loss of consumer confidence, Southwest and indeed all airline stocks are simply not a wise investment at this point.
But as Chris Lau points out, Southwest is a well-run company that is very cheap to own at the moment. The pandemic will serve as a winnowing process for poorly managed companies. Southwest doesn’t fit that category, but it still doesn’t mean that LUV stock is a good investment. That’s not assigning fault, just giving facts.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, he did not hold a position in any of the aforementioned securities.
