key: cord-285829-adz819gj
authors: Maneenop, Sakkakom; Kotcharin, Suntichai
title: The impacts of COVID-19 on the global airline industry:An event study approach
date: 2020-08-27
journal: J Air Transp Manag
DOI: 10.1016/j.jairtraman.2020.101920
sha: 
doc_id: 285829
cord_uid: adz819gj

This study examines the short-term impact of the 2019 novel coronavirus (COVID-19) outbreak on 52 listed airline companies around the world by using event study methodology. The results demonstrate that airline stock returns declined more significantly than the market returns after three major COVID-19 announcements were made. Overall, traders reacted differently during the three selected events. The strongest overreaction was noted in the post-event periods of the World Health Organization's and President Trump's official announcements. Moreover, the findings confirm that traders in western countries are more responsive to recent information than those in Asian countries. The findings call for immediate policy designs in order to protect the airline industry around the globe.

The 2019 coronavirus pandemic as the newest global risk has disrupted business operations in almost every sector. The airline industry is one of the first sectors that was affected from the event because the disease is easily passed among people. To date, there is no official medical treatment for the disease, causing a tremendous panic for world citizens. Thus, governments around the world have launched immediate policies to stop cross-country transportation. The market value of the airline business has shrunk since then.

Ultimately, this incident motivates us to study the impact of COVID-19 on the performance of the airline industry around the world. Because the COVID-19 is a new event, we are not able to find exactly similar events for comparison.

Similar influences can be seen in the catastrophic shocks from airline disasters (Kaplanski and Levy, 2010) , the September 11, 2001 attacks (Gillen and Lall, 2003) , and the impact of Severe Acute Respiratory Syndrome (SARS) on airline stocks (Loh, 2006) . A recent study documents the impact of COVID-19 and employment in the airline industry (Sobieralski, 2020) , but the impact of the COVID-19 virus on airline stock prices has not yet been investigated. In order to fill this gap, we aim to examine the airline stock returns during the spread of the COVID-19 pandemic.

Although the World Health Organization (WHO) announced the first infected case in China on December 31, 2019 (WHO, 2020), we consider three major dates related to COVID-19: (1) the first infected case outside China reported in Thailand (January 13, 2020); (2) the outbreak in Italy (February 21, 2020); and (3) the declaration by WHO on the global pandemic outbreak and the announcement of the U.S. ban on travelers from 26 European countries (March 11, 2020) (Dunford et al. 2020) . We select these three dates because they demonstrate important steps regarding the uncontrolled COVID-19 infection.

We employ event study methodology in order to investigate the impact of official press releases on airline stock returns. Fifty-two listed airline stocks covering all continents are included in the study. The first event did not show a significant drop in cumulative abnormal returns, reflecting an underestimation of the severity of COVID-19.

However, the situation is reversed in the subsequent two events, showing a huge decline in global airline stock prices. This in turn indicates the overreaction of stock market traders. Our findings support Ding et al. (2020) and Ru et al. (2020) , who document that the COVID-19 outbreak economically affects stock returns. Moreover, traders in Western countries seem to absorb information faster than those in the other regions.

This study contributes to prior literature on catastrophes in the airline business. To the best of our knowledge, we are among the first to explore the impact of this unprecedented event on this sector. In addition, the sample is relatively distinctive, including major listed airline firms, which is different from other papers in transportation finance that focus on a particular country. It also sheds light on the implications for policymakers in terms of implementing joint actions of fiscal and monetary policies, such as financial relief packages and taxes in order to alleviate the negative economic impact of COVID-19 on this capitalintensive industry.

The rest of this study is organized as follows. Section 2 describes the data and Section 3 discusses the research methodology. Empirical results and policy discussion are presented in Section 4. Section 5 provides the conclusion.

We select active firms in the air transportation code (SIC 4512), in particular labeled travel and leisure. As of April 2020, the initial sample includes 103 listed firms around the globe. However, as most countries have only one listed airline firm, we decide to choose the country with at least four listed firms as our sample setting in order to remove the potential bias of a small sample. 1 The remaining sample contains 50 firms in nine countries, located in Asia, Australia, Europe, and North America. We include Chile and South Africa as representatives of the remaining continents, although they have only one listed airline firm.

Thus, the final global sample consists of 52 listed firms, 2 accounting for more than 50% of the entire sample. The major stock market index in each country is used to calculate the market return. Stock prices and market prices in local currencies are obtained from DataStream.

Event study suggested by Fama, Fisher, Jensen, and Roll (1969) is the main methodology employed in this research, which is a common methodology in the economic and finance literature to investigate the impact of new information arrival from a particular event on stock prices. This method is used to test semi-strong form market efficiency 3 which states that all publicly relevant information is already incorporated in stock prices. If this efficiency holds, stock prices should quickly and immediately reflect public information announcements. In other words, an announcement can be considered as newly relevant information to investors. A short event window is usually used to mitigate the effect of irrelevant information on stock prices.

The common approach of event study begins with a regression of stock returns on the market returns which provides the parameters to estimate expected stock returns, which are believed as fair values. The abnormal returns, which present the result of the stock market's reacting to new information, are then estimated as the difference between the actual stock returns and its expected returns. If the market is semi-strong form efficient, abnormal returns should be zero, implying that market prices are the same as fair value. This approach has recently gained attention within the global airline industry (e.g. Gillen and Lall, 2003; Park, 2004; Gong et al., 2006; Gong et al., 2008 , Ho et al., 2013 .

We select three important events representing the development of the COVID-19 pandemic, which are (1) the first infected case outside China reported in Thailand (Event 1: January 13, 2020); (2) the outbreak in Italy (Event 2: February 21, 2020); and (3) the declaration by WHO on the global pandemic outbreak and the announcement of President Trump to ban travelers from 26 European countries (Event 3: March 11, 2020). The ultimate goal is to examine whether abnormal returns exist surrounding the determined event periods.

The results imply time-varying behaviors of the participants in stock markets in the global airline industry. We begin with the market model as seen below.

where ܴ ,௧ and ܴ ,௧ are daily returns of stock ݅ and daily market index returns on stock market ݉ at time ‫,ݐ‬ respectively, which is the difference in two consecutive prices. ‫ݑ‬ ,௧ is the residual of stock i at time t, which is independent and identically distributed.

Next, we estimate the parameters of the market model during the estimation window in 2019. The abnormal return of stock ݅ at time ‫ݐ‬ ‫ܴܣ(‬ ,௧ ) is

where ߙ ො and ߚ መ are the estimated parameters of stock i from Equation (1).

‫ܴܣ‬ ,௧ captures the impact of the event when the information of the three above mentioned events are announced to the markets. If ‫ܴܣ‬ ,௧ are significantly different from zero, it implies that market value deviates from fair value. ‫ܴܣܥ‬ ,(௧ భ ,௧ మ ) is accumulated abnormal return of stock i during period t 1 and t 2 . We investigate whether the market value deviates from the fair value by testing if ‫ܴܣܥ‬ ,(௧ భ ,௧ మ ) is significantly different from zero. Negative or positive ‫ܴܣܥ‬ ,(௧ భ ,௧ మ ) implies that stock prices deviate from their fair value during the examined period when the market responds to the new information. The cumulative abnormal return of stock i from time t 1 to t 2 ‫ܴܣܥ(‬ ,(௧ భ ,௧ మ ) ) is defined as

We use an event window of the period from 5 days before each event date to 5 days after the event date [-5,+5] . The event window [-5,+5 ] is selected to reflect the efficiency of financial markets. Prior literature in transportation and logistics finance determines an event window no longer than 10 days (Park, 2004; Gong et al., 2006; Gong et al., 2008) . Moreover, we choose the short event window as each event is close to one another. Therefore, we can separate the effect of one event from the effects of another event to alleviate confounding effects (McWilliams and Siegel, 1997) . Further, a long event window can reduce the power of statistics Warner, 1980, 1985) . We conclude that during the high uncertainty of the COVID-19 pandemic, investors change their trading behaviors given the arrival of new information; however, they sometimes do not react reasonably or logically, causing a problem of underreaction and overreaction.

Importantly, during this highly uncertain period, the stock traders in the airline business were highly vulnerable to the new arrival of COVID-19 information, which greatly deviated stock prices from their intrinsic values. This divergence calls for regulators and policymakers to deal with the ongoing problem, which is discussed and proposed in Section 4.3. (Ru et al., 2020) , and that governments around the world might have found a vaccination in the near future. More importantly, traders did not anticipate that the performances of cross-continental airlines would have greatly deteriorated due to the lockdown policy in many countries. Thus, they underestimated the genuine effects of COVID-19 on global economic conditions.

Second, the abnormal returns are for the most part not statistically significant on the event date for any of the events because investors already took the information into account during the pre-event window periods. However, the stock markets in Australia, Canada, and

China generated significantly negative returns during Event 3. Last, evidence in the last window [0,+5] is strongest, especially for Event 3. From this event, we can observe that the situation was improved in the Asian countries. As Event 3 is directly associated with the U.S., the impact on the U.S airline business was dramatic. The U.S. traders overreacted more than during the previous two events. The same evidence can be seen in Canada, as the policy and economic conditions are very close to those in the U.S. Nevertheless, the finding on the U.K. airlines shows the greatest impact, causing cumulative negative abnormal returns of 53.73%. We suspect that this result is driven by the herd-immunity policy, which has been debated a great deal among global physicians.

In general, Asia-based airline stock prices suffered less than the rest of the group. The much lower price effect may be thanks to government interventions. For instance, in February 2020, the South Korean government, via Korea Development Bank, provided statebacked loans to airlines that had cash crunches (Choi, 2020) and in March 2020, the government injected more capital together with exempted fees and deferred payments of airport landing and facility fees (Kim, 2020) . These schemes potentially helped soften the panic of the investors amid the COVID-19 pandemic crisis.

Our results are robust in two ways. First, we vary the estimation window using second-half data for the year 2019. Second, the pre-event and post-event widows are redefined according to the periods from [-5 ,0] to [-1,0] and [0,1] to [0,+5], respectively. In general, the results remain qualitatively and quantitatively the same as seen in our presented findings.

In addition to event study method, we measure fair value of airline companies based on their earnings, reported as of March 2020. Then, we examine the overreactions of traders to the events by testing the difference between the actual market prices and the fair values.

We use the following price-to-book valuation to calculate for fair value of stock prices. 5 We investigate more in depth by examining particular airline companies. However, due to data availability, the remaining samples equal 35 airline companies. The results are shown in Table 2 . Column 1 shows market value of each stock. Column 2 reports fair value of stocks using Equation (4). Column 3 states percentage differences between market value and fair value. The results show that market values significantly drop below fair values for most companies, leading to significantly average differences in mean and median of -22.10%

and -48.00%, respectively. Our findings, thus, confirm that investors overreact to COVID-19 pandemic events.

Our findings provide greater understanding of how the airline stock prices deteriorated during the crisis due to investors' interpretation of information. As can be seen in South Korea, policy announcement from the government could lessen investor overreaction.

In this section, we further discuss and suggest policy responses, covering fiscal and monetary measures as well as other measures (e.g., employment, waiving airport use charges, administration).

We suggest that policymakers should deploy prompt and adequate policy interventions. The stimulus packages (e.g., loans and loan guarantees) can help restore investor confidence from the economic impacts of COVID-19 in the airline industry since the investors timely respond to the new information. During the COVID-19 crisis, banks may be reluctant to lend to the financial distressed airlines due to increasing bankruptcy risk of the airlines. Thus, the ability to access low interest loans or government-backed financing is critically important for a company to survive. In line with the suggestion by Ramelli and Wagner (2020) , the governments may alternatively purchase newly issued bonds on the primary market.

In addition, tax deferrals and aviation tax reductions should be implemented in the airline industry, especially for cash constrained airlines. To our knowledge, an exemption or reduction of inputs such as spare parts used in airline business from import taxes are used in a few countries. Governments should temporarily increase subsidies during COVID-19 crisis.

For example, jet fuel tax cut can be implemented for domestic flights to reduce operating costs due to a decline in passengers. However, policymakers need to incorporate their country circumstances into the policy design and link the measures with sustainability practices.

Other measures such as employment and waiving airport use charges (aircraft parking and landing fees) can be included in the relief package. Governments should have some conditions on accessing loans including maintaining employment. Unpaid leave programs may be a better alternative option than a lay-off policy. For instance, in South Korea, low cost carriers' employees who were off work would be guaranteed 70% of their average wages due to the special employment support from the Ministry of Employment and Labor (Choi, 2020) .

Although the mentioned support measures may reduce the probability of bankruptcy or prevent liquidity crunch, several vulnerable airlines faced with financial distress ended with bankruptcy (Mahtani and Garg, 2018) . Alternatively, the administrative measures should allow the airlines to change their business plans and establish alternative. Besides, they should be able to operate irregular flight schedules reflecting market demand. Such policies can alleviate investor panic. Table 3 summarizes suggestion measures in response to COVID-19.

The COVID-19 pandemic has caused disruptions in all parts of the world. In this paper we aim to investigate the impact on the global airline business because it is among the first industries to receive this impact. Three crucial announcements are selected to be studied.

We find that the trading behaviors of global traders are intertemporal, with the greatest impact on Event 3. More specifically, the underreaction and overreaction to the announcements are found in Event 1 and Event 3, respectively. Most of the findings are evident in the post-event period in Event 3, especially in Canada, the U.K., and the U.S. We offer several facts and potential explanations for the findings in this paper. As the COVID-19 pandemic has been ongoing, our results call for the policy implications below.

We understand that the government in each country is at an intersection-whether to provide financial support or guarantee existing debt, or to believe in market mechanisms and let the airline firms file for bankruptcy. In order to back up the airline industry, several alleviation policies may deal with mergers and acquisitions, tax policy, and government subsidies. These policies, of course, will increase the national debt of society. Otherwise, firm liquidation in the airlines is, perhaps, inevitable and subsequently will disrupt the global supply chain and related businesses.

School.

Page 13 of 18 

Measuring security price performance

Using daily stock returns: The case of event studies

Corporate immunity to the COVID-19 pandemic NBER Working Paper No. 27055

Coronavirus: The world in lockdown in maps and charts

Efficient capital markets: A review of theory and empirical work

Efficient capital markets: II

The adjustment of stock prices to new information

International transmission of shocks in the airline industry

The information content of earnings releases by global airlines

International oligopoly and stock market linkages: The case of global airlines

Do airlines always suffer from crashes?

Sentiment and stock prices: The case of aviation disasters

Government to roll out additional support plan for COVID-19-hit aviation industry

The impact of SARS on the performance and risk profile of airline stocks

An analysis of key factors of financial distress in airline companies in India using fuzzy AHP framework

Event studies in management research: Theoretical and empirical issues

A guide to using event study methods in multi country settings

Feverish stock price reactions to COVID-19. Forthcoming, Review of Corporate Finance Studies

What do we learn from SARS-CoV-1 to SARS-CoV-2: Evidence from global stock markets

COVID-19 and airline employment: Insights from historical uncertainty shocks to the industry Transportation Research Interdisciplinary Perspectives

World Health Organization (WHO) 2020. WHO Timeline -COVID-19