The outbreak of Coronavirus Disease 2019 (COVID-19) started in China, but has now spread globally.  At the time of writing, the latest data show slightly over 100,000 confirmed cases worldwide, and just under 4,000 total deaths.  In the US there has about 600 coronavirus cases and 21 deaths However, testing has been limited, so its likely that are many more cases.  Two weeks ago, the US Center for Disease Control and Prevention (CDC)  warned that Americans should be ready to experience disruption to their daily lives.

Investors can’t avoid the coronavirus outbreak.  The key question is how deep and how long the crisis will be.  No sector is immune, but the most direct impact will be felt in the airlines sector.

Impact on airline revenue

Initially, coronavirus only impacted travel to and from China.  However, the impact is now hitting US domestic air travel.  Many high profile industry conferences have been cancelled: South by Southwest, Adobe Summit, F8, I/O, IBM Think. Dell World etc.  Many major US companies such as Twitter, Facebook, Google, and Amazon have instituted work from home policies and cancelled domestic business travel.  People are less likely to take vacations until it clears. Social distancing measures will have a devastating impact on airlines.

Airline are already feeling the pain. Last week, United Airlines announced it was cutting 10% of flights.  Jet Blue said it is cutting 5% of domestic capacity.  Delta, United, and American have all cancelled flights on popular international routes.  At the same time, since airlines must conduct flights in order to maintain their access to flight slots at airports, many are flying near empty planes. Given the capital intensive nature of running an airline, few will have the flexibility to adjust.

How bad will it get?

Travel bookings were dropping off sharply in countries most impacted by the virus. Note that this chart is from March 2, and the virus has spread much more in the US and Europe since then.

Coronavirus impacting airline revenue

The International Air Transport Association(IATA) recently estimated that airlines worldwide could end up losing $113 billion in revenue in an “Extensive Spread” Scenario.   This scenario assumed that air traffic in countries with 10 or more cases would have two months with a steep drop off like what China experienced this year. After two months, passenger demand is modeled after the SARS episode.  Its possible that reality might end up more severe. If the spread of the coronavirus is worse than expected, the impact will go straight to airline revenue numbers.

Early sell side estimates indicate that the coronavirus will cause the sharpest drop in airline demand ever, even worse than the terrorist attacks of September 11, 2001.

Its been nearly two decades since the airline industry faced a crisis this severe.  After the terrorist attacks of 9/11 air travel dropped off sharply, and it took three years for passenger number to regain their peak.  Furthermore,  9/11 was a single discrete event, while the coronavirus outbreak is ongoing and continuous. 

How long will it last?

According to analysis from the IATA, previous outbreaks peaked after 1-3 months and recovered pre-outbreak levels within 6-7 months.  However, coronavirus has spread further and wider than any of these previous diseases.

In past outbreaks, airline revenue has returned to normal after a few months

Its also worth noting that major epidemics and pandemics often have 2 or more waves of cases.  In the case of the 1918 Spanish Flu, the second wave was actually far more severe than the first.  The 2009 H1N1 outbreak also had two waves, although it was less far less severe severe.  

This chart shows how the death rate changed for each of the three waves of the Spanish Flu Epidemic.

Spanish Flu followed two waves

Source: 1918 Influenza: the Mother of All Pandemics

If there is a second wave of the coronavirus outbreak it will hit airlines especially hard. Worse yet, airlines will likely need to resort to price competition in order to lure travelers back in a time of uncertainty.

There is no doubt that next quarter’s airline revenue will be lower. But how much lower? Will the impact persist through the end of 2020? These are questions people exposed to the airline industry must face.  Unprecedented times call for new investor tools.

BLX Domestic Airline Revenue Index

BLX Domestic Airline Revenue Index (.BLXDAR) tracks changes in the reporting revenue of a select group of US listed airlines.  Priced daily, it reflects the percentage changes in the aggregate trailing twelve month revenue for index components.    Airlines have experienced consistent revenue growth over the past few years as the historical chart shows:

Trade Airline Revenue Directly

Prior to the coronavirus outbreak, expectations were high for the airline industry.  Delta, and other airlines increased forward guidance during earnings calls, and most analysts were forecasting continued revenue growth for all major airlines.    Now American Airlines, Delta and United Airlines have officially suspended earnings guidance, and prior guidance from other airlines is obsolete.  Wall Street analysts are scrambling to revise their prior estimates downwards.  Investors need to source their own data and build their own models in order to estimate how deep and how long the impact will be.   Since the index is priced based on reported revenue, earnings season bring a lot of volatility.

Bullish or bearish, options based on the BLX Domestic Airline Revenue Index(.BLXDAR) provide the ideal vehicle for trading the coronavirus impact on airline revenue.

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