ALK’s Delta Variant-Led Warning, GOL, AZUL in Focus

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In the past week, Alaska Air Group ALK warned of revenue weakness for the third quarter of 2021 as the rapid spread of the highly contagious Delta variant of COVID-19 affects bookings and increases cancellations. We remind investors that the likes of Southwest Airlines LUV had earlier issued a similar warning, which conveyed that its September-quarter revenues are likely to be dented by the Delta variant-induced weakness.

On the traffic front, Brazilian carriers, namely Gol Linhas GOL and Azul AZUL reported a significant increase in their respective August traffic numbers on a year-over-year basis. The surge was owing to the uptick in air-travel demand in Brazil, led by increased vaccination programs.

Expecting air travel to Latin America to gain further momentum in the winter, United Airlines UAL intends to add flights to destinations in Latin America and the Caribbean belt.

Recap of the Past Week’s Most Important Stories

1. Per an investor update, Alaska Air’s bookings have “deteriorated moderately” over the past few weeks due to rising coronavirus cases. On account of softness in forward bookings, the carrier now anticipates cash flow from operations in the range of $0-$50 million in the third quarter compared with $0-$100 million expected previously. Capacity, measured in available seat miles (ASMs), is estimated to decline 17-18% approximately in the third quarter from the comparable period’s figure in 2019 (previous expectation: down 17-20%). Passenger load factor (percentage of seats filled with passengers) is predicted in the band of 79-81% (previous expectation: 82-85%). Total revenues are forecast to drop 19-21% from the comparable period’s number in 2019(earlier expectation: down 17-20%).

2. American Airlines, currently carrying a Zacks Rank #3 (Hold), will do away with special leaves for unvaccinated employees who contract COVID-19 and need to quarantine, starting next month. While the special leave policy will still be valid for the fully vaccinated employees who fall sick due to the coronavirus, the unvaccinated staff will have to use their sick time or medical leave for absence from work on the same ground.

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3. Gol Linhas’ traffic surged 84.7% year over year in August. In the same time frame, capacity expanded 83%. As traffic surge outweighed capacity expansion, load factor increased to 80.2% from 79.4% recorded a year ago. Gol Linhas’ total monthly departures skyrocketed 93.5% while seats surged 95.9% from the respective year-ago figures. Gol Linhas transported 1.5 million passengers in August (up 87% on a year-over-year basis). The airline did not operate international flights in the said month.

4. Driven by a strong domestic market, consolidated load factor at Azul increased 2.5 percentage points to 77.9% in August. Consolidated traffic and capacity were up 173% and 164.3%, respectively. Azul’s traffic and capacity increased 6.5% and 12%, respectively, from the August 2019 numbers.

5. Ryanair Holdings RYAAY ended talks with Boeing over the purchase of 737 MAX 10 jets as both parties disagreed on price-related issues. The former is the largest European customer of the 737 Max jets. Per CEO Michael O’Leary “We are disappointed we couldn’t reach agreement with Boeing on a Max 10 order”. “However, Boeing have a more optimistic outlook on aircraft pricing than we do, and we have a disciplined track record of not paying high prices for aircraft.”

Ryanair was also in the news, courtesy of its impressive August traffic report, which was mentioned in the previous week’s write up.

Price Performance

The following table shows the price movement of the major airline players over the past week and during the past six months.

Image Source: Zacks Investment Research

The table above shows that all the airline stocks have traded in the red over the past week, inducing the NYSE ARCA Airline Index to dip 2.8% to $89.87 as the Delta variant-related woes continue to hurt the industry. Over the course of the past six months, the NYSE ARCA Airline Index has depreciated 17.3%.

What’s Next in the Airline Space?

With a healthy air-travel demand scenario in Latin America, Copa Holdings’ CPA August traffic report, expected shortly, is likely to be impressive compared with its August 2020 reading.

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