Markets shrug off central bank efforts and airlines face widespread grounding

Federal Reserve

“Cutting rates to zero and unleashing another wave of QE may seem like a shock and awe move, but it’s the playbook from a different crisis. What’s needed is a mechanism that delivers debt forbearance until such time that the economic world starts to spin on its axis again. The Fed is fighting yesterday’s war,” says Kevin Doran, Chief Investment Officer at AJ Bell.

Market reaction

“While central banks around the world continue to fire everything they have to mitigate against a coronavirus impact on the markets, they weren’t able to prevent further carnage on Monday. The FTSE 100 marked lows not seen since the financial crisis and is testing the 5,000 mark," says Russ Mould, Investment Director at AJ Bell.

“With scores of countries entering lockdown and little certainty on how long such draconian measures might be in place, investors are taking flight even if this means crystallising heavy losses which might ultimately be recovered once the crisis has been averted.

“Some shocking figures out of China, showing double-digit declines in activity in several parts of the economy, much worse than forecast, is probably being taken as an indication of where the US and Europe could be headed.

“While airlines stood out, few industries are being spared the pain. Sympathy may be in short supply but Flutter Entertainment’s update lays bare the devastating impact on the bookies of the widespread cancellation of sporting events.

“Associated British Food owned Primark faces a hit as it shutters stores across Europe, though in a sign of the changing dimensions of this outbreak, supply chain issues in China are actually starting to alleviate,”

Airlines

“The airline sector is in a precarious position. Ever-increasing restrictions on travel are forcing the industry to ground planes and dramatically reduce capacity. This will put significant pressure on airlines to cut costs as quickly as possible in order to survive what could be one of the hardest ever years for the industry.

“The sector has a reputation for being heavily indebted and a poor track record for seeing through crises. We’ve already seen Flybe go into administration and we will no doubt see more airlines fail.

“Wizz Air almost boasted at the weekend that its strong balance sheet would help see it through the current crisis, giving it a competitive advantage over rivals who might be struggling financially.

“To survive, airlines will need access to significant levels of funding, be it lines of credit or chunky cash piles. Shareholders can wave goodbye to any dividends and airlines certainly won’t be buying back shares in the current environment, even though their stock may look very cheap compared to recent history.

“EasyJet and International Consolidated Airlines have both announced that unprecedented levels of travel restrictions could see a large amount of their fleet grounded. Beyond using the time to do some maintenance, the airlines will simply be sitting on their hands.

“The knock-on effect is that staff will be forced to take leave and service companies such as John Menzies which helps to clean and load EasyJet planes when they land will not be able to do their job.

“Travellers won’t be spending money in the airport, thus hurting the likes of WH Smith, SSP and Restaurant Group, all of whom run concessions in departures lounges. Hotel chains like Whitbread’s Premier Inn will be suffering from reduced business and the suppliers to these outlets will also be feeling the pain. The trickle-down effect will stretch even further.

“It is frustrating for individuals not to be able to go on holiday at the moment, yet spare a thought for anyone owning shares in the airlines as they’ve seen significant declines.

“Year to date, Jet2-owner Dart Group is down 69% in value. EasyJet has lost 62% of its value and British Airways owner International Consolidated is down 56%. The market is pricing in a significant decline in earnings and the situation looks like it could get even worse as more countries go into full-blown lockdown.

Airline stocks: movement year to date

Dart Group (Jet2) -69%
EasyJet -62%
International Consolidated Airlines -59%
Wizz Air -49%
Ryanair -44%

These articles are for information purposes only and are not a personal recommendation or advice.