Airlines stocks to watch as coronavirus sparks selloff
Airlines have been hit hard off the back of the coronavirus crisis. With the current lack of demand likely to worsen in the coming month, there is likely to be further declines for the sector.
The airline sector has been one of the hardest hit over the course of the first two-months of 2020, with the spread of the virus ramping up fears over global travel demand. In fact, we have seen the wider travel sector damaged, with cruse operators and hotel owners also seeing sharp declines. Nevertheless, with FlyBe going into administration, we are seeing a spotlight on a sector which appears to be hitting serious headwinds after a period that had been dominated by worries associated with the Boeing 737 Max grounding.
FlyBe demise follows a worrying trend
The news that FlyBe is set to enter administration should not come as a complete surprise given their request for an emergency bailout of £100 billion from the government. Fresh off the back of Thomas Cooks collapse a year ago, this is yet another sign that the industry is under pressure as has been highlighted by a race to the bottom in terms of prices and standards for much of the industry. The FlyBe demise has been a long time coming, yet with the coronavirus crisis delivering yet another blow to demand, we have seen the ‘Connect Airways Consortium’ remove the life support they had been providing.
How will the Coronavirus impact the sector?
IATA data highlighted a trend of slowing air traffic growth this January, with the rate falling to a near ten-year low of 2.4%. Nonetheless, this is likely to be just the beginning of a sector slowdown, with airlines throughout the world cutting routes as demand plummets. Nonetheless, while the number of planes will continue to fall, we are also likely to see a huge decline in the load factor, driving down profit margins on those journeys that go ahead. Of course, the demise of the sector will be hugely dependant upon the spread and impact of the virus. However, with cases outside of China rising from 227 to 15,000 in the space of a month (6000% rise), there is a strong chance that March will be a critical month as the authorities battle the virus. If we saw that same rate of advance, we could be looking at one-million cases outside of China in a months time. That would be a gamechanger, with measures being put in place to avoid contamination. It would also radically shift the outlook for global travel, with a higher rate of anxiety likely to translate into further suffering for the airlines.
What stocks should we follow?
Looking across a number of major European and US airlines, we can see that the experience of the past month has been varied. On the whole, European carriers have seen relatively similar declines, with the difference between the Wizz Air (26%) and IAG losses (34%) amounting to 8%. However, US airlines have been much more varied, with the Delta to Spirit differential standing at a whopping 25%.
Lets take a look at some of the lesser sold charts to see which stand out as potential shorting opportunities.
Delta Air has only seen 19% wiped off its shareprice, with the huge gains seen throughout the past two decades providing plenty of downside to move into without making as much of an impact. The monthly chart highlights that incredible rise, with the recent declines taking us into but not below the $43.58 support level.
A break below that point would clarify a likely to for this market, where a sharp rise in US coronavirus cases would likely bring significant declines for this stock. The gains we are currently seeing reflect some optimism from both fiscal and monetary easing plans. However, further declines look highly likely if the virus is not brought under control.
Unlike Delta, we are seeing the declines continue this week for Wizz Air, with eight-month lows created on Monday. From a wider perspective, it is clear that we are looking at a breakdown from a rising channel formation that took place over the past 16 months.
The uptrend in place points towards the potential for Fibonacci support to play a role in any further downside. However, given the potential shock we could see if this virus turns into a pandemic, it looks likely we will see price break past those support levels. Given the shallow retracement we have seen over the course of this week, a break below the 32.47 support level would look like a good shorting opportunity with stops placed above the 35.60 mark.
Shares in easyJet have continued their declines this week, with the consolidation seen throughout the past seven-years continuing with the latest move back towards the lower echelons of this range.
This chart certainly does provide a potential target for us to move towards, with the 6.84-7.67 zone typically respected as an area of value in the past. With that in mind, further downside looks likely in the event that we see further escalation of this virus.
Ryanair saw a strong outperformance in the final quarter of 2019, with price rising back into the 76.4% Fibonacci retracement level.
However, we are seeing that move unwind now, as price hits a four-month low today. Given the break below 10.53 in December 2018 and subsequent respect of the wider 76.4% resistance level (17.08), it is likely that we are now heading for a move back towards the 8.39 lows from August.
Shares in the British Airways owner have seen sharp declines over the first two-months of the year, with the IAG price now moving into a crucial area of support.
With an ascending trendline and horizontal £3.90 level to contend with, a break below this impending confluence of support would signal a reversal of the long-term uptrend for this stock. The sharp declines seen throughout the past two-months are unlikely to be the last, with further losses likely if we see this support zone broken.
Opportunities for both traders and investors
The demise of this sector is not a given over the coming months, with efforts to control the virus likely to be critical as they seek to instill confidence in global travel once more. However, by the current rate of expansion, the most likely scenario is a global pandemic before any vaccines can be developed. With that in mind, there is likely to be plenty of selling for the travel sector as demand plummets.
This can be a shorting opportunity for traders, yet also an opportunity for those with cash on the sidelines who wish to pick up well stocks at discount prices. With that in mind, declines are seen as a two-pronged opportunity. Short-term declines provide the potential to benefit from sharp price movements, while devalued stock prices can bring about a once in a decade opportunity to buy into a sector that will never go away. Airlines will always be around, and this virus will be confined to history before long. In the meanwhile, there are opportunities for those that seek them.
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