The aviation industry has been hit hard by the novel coronavirus and that has translated into major obstacles for platemakers and their suppliers. That trickle-down effect has throttled General Electric (NYSE:GE) as the firm’s aviation division struggles through the slow-down in demand. GE stock saw its share price fall 4% on Thursday after CEO Larry Culp admitted that it would take years to nurse the firm’s aviation business back to life.
The writing was on the wall for GE earlier this month when Boeing and Airbus revealed that airlines were no longer accepting deliveries.
As completed jets piled up for both plane makers, it was clear that anyone and everyone that depends on airlines for business would be weighed down by the industry’s struggle.
GE Stock Isn’t Getting its Turnaround
For GE, the problem is compounded by the fact that the firm was in the middle of a long and arduous turnaround effort that appears to be on the cusp of materializing. With Larry Culp taking over, investors were optimistic about the firm’s potential to emerge like a phoenix from the ashes.
Unfortunately, no one could have predicted a pandemic, and although Culp’s transition plans were worth believing, without aviation a turnaround seems impossible.
Before coronavirus halted air travel completely, GE’s aviation business was a beacon of hope for GE stock. The firm’s power division had been casting a shadow over otherwise encouraging results for the aviation division. Culp was confident that the firm was about to turn things around.
The most recent quarter proved Culp would have been right if coronavirus wasn’t in the picture— GE’s power division has been steadily improving. Aviation, on the other hand, has fallen off a cliff.
On its own, that’s bad news for GE stock, but what’s more troubling is the lack of clarity about the future. Culp admitted he doesn’t know where the bottom is for aviation. That’s because Boeing (NYSE:BA) isn’t sure when it will be able to deliver its completed jets— let alone get its MAX jets back in the skies.
Boeing can’t deliver because airlines don’t have enough money to pay for the new planes. They don’t know when they will, because the entire series of dominoes depends on one very volatile tile — coronavirus.
Don’t Count on a Swift Recovery
In many ways, we all know exactly how this will play out, at least over the next year or so. Air travel will remain at record-low levels and lockdowns around the world will keep people from unnecessary trips. Business travel will also decline because of improving telecommuting technology and firms will likely halt overseas trips in order to save money in the medium-term.
If a vaccine is discovered in the autumn, it will likely take a year (if not more) to get it readily available to the public. Even that outcome is a best-case scenario. It could take longer. Or it could not happen at all.
The point is that the only outcome that would be positive for airlines and their suppliers is the virus miraculously disappearing. A surge in cases in Australia and other southern-hemisphere countries suggests a second wave is more likely.
Unlike many airlines, General Electric will probably weather the storm. But GE stock will be weighed down by its airline business on top of its other issues for the foreseeable future.
The Bottom Line on GE
It’s easy to look at airlines and their suppliers as a bet on the return to normalcy, but the bottom like is that airlines will be one of the last sectors to recover from the coronavirus pandemic.
Air travel won’t recover for years, even without the threat of Covid-19. Airlines will need that demand to filter through their business in order to afford the planes they’ve already ordered, let alone make new planes that require new engines.
GE stock isn’t the best way to play the post-pandemic world just yet as the firm will probably suffer from its effects well into 2021.
Laura Hoy has a finance degree from Duquesne University and has been writing about financial markets for the past eight years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing, she did not hold a position in any of the aforementioned securities.
