US Airlines May Experience Weakness In Air Travel Demand Due To Paris Bombings

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The unfortunate serial bombings in Paris on Friday are likely to slow down the surging profits that airlines across the world have been enjoying due to depressed oil prices. The fear of a significant drop in air travel demand due to safety concerns, led to a sizeable dip in the stocks of travel and tourism companies, particularly the aviation industry, on Monday – the first trading day after the attacks – hinting that the golden days of the airline industry may be nearing an end. Although the European airlines were the worst hit by the tragic event, the US airlines also had to bear the brunt of the investor anxiety. The three largest network carriers in the US – American Airlines, United Continental, and Delta Air Lines – saw a notable plunge in their stock prices due to their large exposure to the European markets, while smaller domestic carriers, such as Southwest and JetBlue, witnessed a milder decline in their stocks. Since it is difficult to judge the exact impact of these events on the stock markets, we list the probable short term trends that are likely to follow such mishaps.

DAL-Paris

Source: Google Finance

Air Travel Likely To Take A Hit

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While the past trends show that the urban population has become much more resilient to such acts of violence, the frequency of such terror attacks has gone up significantly over the last few years. The horrifying attack at the French newspaper, Charlie Hebdo, earlier this year, and the bombing of the Russian passenger plane in Egypt two weeks ago, has created a hesitation among passengers for traveling to the European countries. Now, with the Paris attacks, this sense of fear and insecurity is expected to grow deeper among travelers. Though the French government will take all necessary measures to boost the safety and security in the country, the tourism industry is anticipated to face a downturn in the short term. Apart from the European airlines, the three US legacy carriers who have a substantial exposure to France and other European markets are expected to take a hit in their international revenue.

Among the US airlines, Delta will be the most impacted by this trend, since the airline has a joint venture with Air France-KLM and Alitalia for transatlantic flights. Since these ventures have a revenue-sharing and cost-sharing component, Delta’s revenue and profitability are directly linked to these flights. However, the transatlantic market is less than 20% of its revenue and the airline has other European hubs at London and Amsterdam which it can use to cover the drop in demand from Paris. American and United, on the other hand, have a lower exposure to these markets as compared to Delta and consequently, are considered to be in a better position to deal with the decline in air travel demand.

 

Recovery In Commodity Prices May Be Short-Lived

Like in other things, financial investors are likely to draw a parallel with the previous terrorist activities, such as the 9/11 incident, to decide their recourse from the attacks in the capital city of France. As has been the case in the past, commodities such as crude oil and gold experience a surge immediately after such acts of terrorism, as they tend to create a sense of insecurity among people. This was evident from the trading at commodity markets on Monday, where Brent and WTI crude oil prices rose more than 2% within a single trading day.

DAL-BrentWTI

Source: Bloomberg

A similar movement was seen in the haven commodity – Gold – which rose for the first time in the last five days, after the violence in Paris, but ended the trading day slightly lower. However, we estimate this trend to be short-lived as the investors have become less sensitive to these terror incidents over the last 15 years. Thus, while the commodities markets are expected to recoup the slump to some extent due to the initial risk aversion of investors, this recovery may not last too long.

DAL-gold

Source: Paris Terror Attacks Prompt Flight To Safety, Bloomberg

Euro To Weaken Further

Another outcome of such terrorist attacks is the weakening of the currency of the country where the incident occurs. In this case, the effected currency will be the Euro. Even without the recent bombings, the Euro has plunged almost 12% against the US dollar since the beginning of the year. But with the recent outrage in Paris, the currency is expected to weaken further over the next couple of months. On Monday alone, the Euro slipped 0.8% versus the US dollar, suggesting that the currency’s downward rally is not yet over. However, just like the commodity markets, we believe that the weakening of the Euro against the US dollar due to the terror activities may be a temporary phenomenon. Regardless of the reason, the weakening of the Euro against the US dollar will have a negative impact on the revenues of the US airlines.

See Our Complete Analysis For Delta Air Lines Here

Conclusion

While it may be too early to comment on the impact of the incident, we foresee some weakness in air travel demand and the Euro, at least in the immediate quarter, which is likely to dampen the positive effect of lower fuel costs for the US airlines, to some extent.

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