March 13, 2020 / 11:13 AM / in a month

Why Brazilian airline shares are hardest hit by the coronavirus panic

SAO PAULO (Reuters) - The airline stocks that suffered the most after U.S. President Donald Trump barred continental Europeans from traveling to the United States do not even operate flights between those two regions.

FILE PHOTO: A traveller wearing protective face mask sits in front of Azul's air lines check-in at Brazilian International Airport, after reports of the coronavirus in Brasilia, Brazil, March 11, 2020. REUTERS/Adriano Machado/File Photo

Brazil’s largest airline, Gol Linhas Aereas Inteligentes, (GOLL4.SA) and its smaller rival, Azul SA (AZUL.N), saw their shares tumble over 30% on Thursday, a record for each. Year to date, both companies’ New York-traded shares are down more than 70%.

To be sure, the world’s top 20 airlines’ shares are all deep in the red this year. But the two Brazilian carriers’ share price losses are in a league of their own.

It may seem surprising at first glance, because both are focused on domestic flights within Brazil and only Azul operates direct routes to the United States or Europe. Neither operates flights to Asia. In other words, they are not directly exposed to the worst travel disruptions.

But analysts say their negative performance is tied to Brazil’s broader economic woes and to a general panic over riskier, more volatile shares.

“You may have portfolio managers with clients who want their money back now,” said Stephen Trent, an analyst at Citigroup. “Emerging markets are risky, and airlines are riskier than other assets. There’s not a huge connection to their fundamentals.”

In addition, Brazil’s currency, the real, is the world’s fourth worst performing so far this year, a key pressure point for emerging market carriers who pay many fees in dollars.

“Anytime that the dollar goes up, that affects (over half) of our costs,” said Eduardo Sanovicz, who heads Brazil’s airline industry group ABEAR. “It’s not a positive thing.”

And no major stock exchange has fallen more than Brazil’s so far this year. Refinitiv data shows that Gol and Azul have been traded more than average in recent days.

“Gol and Azul are super liquid shares,” said Azul’s CEO John Rodgerson on Thursday. “And they are being used that way.”

But the carriers’ negative performance also highlights that the airline business in Brazil has struggled for years to be profitable, weighed down by a shaky economy, high labor costs, and a volatile currency.

Earlier Thursday, Azul reported a 2019 loss of 2.4 billion reais ($503 million), although the company said it would have turned a profit if not for charges related to the sale of old aircraft.

Gol has lost over 9 billion reais since 2008, but emphasized in a presentation to investors on Wednesday that it had little exposure to cross-continental international flights.

Brazil’s airline trade group is urging the government to offer tax relief and incentives to cushion the coronavirus impact, mimicking calls from industry associations worldwide. Brazil’s government has said it is considering such a move.

DIFFICULT TIMES

Azul said on Thursday that it will cut its international flights by up to a third, but that it had not experienced a collapse in demand on domestic routes. Still, it has implemented a hiring freeze and will ask some workers to take unpaid leave.

“We are no strangers to difficult times,” said David Neeleman, Azul’s chairman and the founder of JetBlue Airways Corp (JBLU.O).

At least nine carriers have gone out of business in Brazil so far this century. Just last year, Avianca Brasil ceased operating after a failed bankruptcy restructuring.

Slideshow (8 Images)

Brazil’s dominant players are relatively young. Gol was founded 20 years ago, Azul was founded in 2008, while LATAM Airlines (LTM.SN) was born in the 2012 merger between Chile’s Lan and Brazil’s Tam.

While popular with investors at times, all three may struggle to lure them back after the current rout, as analysts at UBS have warned in several recent research reports.

“Trading airline stocks may be hazardous to your wealth,” they said.

Reporting by Marcelo Rochabrun in Sao Paulo; Additional reporting by Paula Arend Laier in Sao Paulo and Anthony Boadle in Brasilia; Editing by Christian Plumb and Rosalba O'Brien

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