There is no question that airline earnings are going to be terrible this quarter. The key questions for investors are : (1) How bad will they be? (2) How long till they recover; and most importantly, (3) What should investors do about it?

How bad and how long?

TSA Checkpoint traffic started to drop off precipitously towards the end of the first quarter.

 

TSA Checkpoint data provides preview of airline earnings

As we move through the second quarter, US air traffic is around 10% of normal.

 

United Airlines today gave a preview of their quarterly earnings. They expect revenues to be down 17% year over year, and they expect to report a $2.1 billion largely due to a large one time special charge. The Covid- 19 coronavirus shutdown is costing United Airlines approximately $100 million per day in lost revenue.  These earnings are preliminary, and United Airlines didn’t indicate when they will report official numbers. Delta is expected to report on Wednesday April 22. Southwest Airlines, and several other airlines will report next week.

The airline industry is a perfect example of an earnings season in the time of coronavirus. Investors are left without management guidance, and forced to scramble for new sources of alternative data in order to build an investing edge. Sell side analysts have been slow to revise their forecasts, but most now expect a bad Q1, and an even worse Q2.  The outlook gets increasingly hazy beyond Q2.

The  BLX Domestic Airlines Revenue Index (.BLXDAR), which tracks changes in the trailing twelve month aggregate revenues of US based airlines,  has climbed steadily since 2014, from 100 to 138. Analysts are expecting a slight drop, with the median estimate indicating a level 134  after airlines report Q1 earnings.  However, after Q2, median analyst estimates have it  dropping below 110.  Obviously, if the lockdown continues, beyond Q2, the index will drop even more severely after the release of Q3 earnings.   This chart shows the indexes historical performance and forward expectations.  Given the high level of uncertainty, its likely airlines will drastically overshoot or undershoot expectations.

Airlines Earnings Estimates

Airlines have been through tough times before.  After previous outbreaks, airline travel returned to normal after 6-7 months.  However coronavirus is much more severe  and widespread than previous outbreaks.  There is no historical precedent for a near complete shutdown of the US economy.   Worst of all, at no one knows for sure when the lockdown will end.

The ideal tool for trading airline earnings

Skytra, a wholly owned subsidiary of Airbus is building an exchange to help airlines hedge revenue risk through the trading of cash-settled futures and options based on series of ticket price indices. However, hedging ticket prices won’t do a lot of good if no one is flying.  Furthermore, asset managers and investors care more about how airline ticket prices flow through to aggregate revenue for airlines. Thats why Earnings Power Indexing is the perfect tool to trade airline earnings in the time of coronavirus.  Investors can license The BLX Domestic Airlines Revenue Index (.BLXDAR) to structure options and other derivative securities.  The coronavirus shutdown is setting up a long run opportunity for savvy investors.  BLX Global is here to so investors can benefit.