Travel demand won’t return to normal until mid-2021, even in the best-case scenario, an analyst warns

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FILE – In this Wednesday, March 25, 2020 file photo, American Airlines jets sit idly at their gates as a jet arrives at Sky Harbour International Airport in Phoenix. Associated Press
  • Air travel demand will not return to pre-outbreak levels until at least mid-2021 – and that’s only if the best-case scenario plays out, according to a new report from an analyst at Stifel.
  • A worst-case scenario would see new travel restrictions and quarantines, coupled with a resurgence of COVID-19 cases in the fall, dragging the crisis out even longer for the world’s airlines.
  • Airline stocks continued their decline this week after a brief rally when the federal bailout package was signed into law on March 27.
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Demand for air travel will not return to normal until mid-2021 at the earliest, under a best-case scenario outlined by an analyst at Stifel.

Under the worst-case scenario for the airline industry, more stringent travel restrictions and quarantines, coupled with a resurgence of COVID-19 in the fall after a slump in the summer, will lead to lower demand for a longer period of time.

For the best-case outcome, analyst Joseph DeNardi wrote in the April 1 report, the growth of COVID-19 cases would slow around the US and abroad as the weather warms, and as various measures to contain the virus – such as social distancing and shelter-in-place orders – have an effect.

Still, under that scenario, demand would only return “to the pre-outbreak trend by mid-2021,” the report said. However, even that may be optimistic.

“Currently, the bearish scenario is playing out,” the report said.

Stocks of major US airlines have been decimated across the board as the novel coronavirus has led to a near-complete drop in travel demand, trading at their lowest levels in years. While shares rallied briefly last week on news that the federal government had passed a nearly $US60 billion bailout for the industry, they resumed their decline this week amid uncertainty over the terms of the aid package.

As part of the aid, which is split into loans and payroll grants, airlines would be required to continue their current levels of service within the US, despite the fact that many planes are flying almost empty. That has caused airlines to hemorrhage money each time they fly, according to Southwest Airlines CEO Gary Kelly.

Airlines are exploring the possibility of consolidating operations to lower overall costs of continuing service, although there is no decision on the matter yet.

However, based on the spread of the virus, DeNardi wrote that a steady decline in demand, coupled with quarantine orders and domestic travel bans or warnings, could still lead to a virtual cessation of flights for up to three months during the normally profitable summer season.

“While timing is difficult to predict, we believe it’s rather likely that airlines suspend scheduled flying in the near future,” the report says. “As such, we assume very limited capacity in our 2Q estimates.”

Creating additional uncertainty for investors, the bailout terms allow the US Treasury Secretary to take equity in the airlines in exchange for aid. The airlines and employee unions are lobbying Treasury Secretary Steven Mnuchin to not execute that option. According to union leaders, that will prompt airlines to decline the offered payroll grants, causing them to begin worker layoffs.

The good news, according to DeNardi, is that even though the industry will likely face structural changes on the other side of the COVID-19 crisis, travel demand should eventually return.

“Demand for air travel has been incredibly robust historically through outbreaks, terrorist attacks, war, aviation accidents,” the report said,” and we see no reason why it won’t be once this outbreak stabilizes and is better understood.”