Displaying items by tag: airlines
The market is making a very strong bet that American Airlines—one of the largest carriers in the US—is going to fail. Bloomberg data shows that based on credit default swap pricing, investors think there is nearly a 100% chance of the Texas-based carrier defaulting in the next five years. There is nothing particularly unique about American Airlines’ exposure to the COVID crisis, except that it has a great deal more debt than other carriers, making it much more vulnerable. For its part, American is trying to “right size” its budget and is planning to downsize its operating expenditures by about $12 bn this year.
FINSUM: Cost cuts are great, but if your revenue has fallen 90%+ plus, all the costs cuts in the world aren’t likely to keep up.
The biggest aircraft maker in the country just put out a dire prediction (although not a surprising one)—that there will be a major airline bankruptcy this year. The airline industry has been wounded as never before, with demand falling more than 90% since this time last year. Most analysts think it will take until the end of year for demand to even rise to 50% of the year prior. Credit default swaps—a proxy for the odds a company will default—are very high right now. For instance, markets are putting a 54% chance that American Airlines defaults.
FINSUM: This is an odd comment from a company that is talking about its biggest clients. It speaks volumes.
If you have any hope for a quick airline recovery post-coronavirus, take that idea, crumple it into a little ball and throw it away. The reality of air travel’s recovery is looking bleaker by the week. On the one hand, additional safety measures are going to be necessity for a long time—and they will be costly. Extra screening, spacing out passengers etc all have significant costs. Additionally, many airlines will have to forego middle seating to create adequate distance between passengers, cutting down on capacity. All of this will come as demand for air travel remains low in the short-term and secularly weaker in the long-term. For instance, business travel for meetings, conferences etc all looks likely to be very slow to recover because companies don’t want to put their workers in harm’s way. Videoconferencing has also proven very effective.
FINSUM: There is likely to be a big clearing out of weaker airlines and several years of losses/less profit for larger ones.
We can finally put a number on it. Anecdotal evidence has shown that airlines and other travel companies are getting hammered. Now analysts have an estimate of just how much of a hit airlines are going to take. The answer is more than $100 bn of lost business because of coronavirus. The specific figure is $113 bn, a 4x increase in forecasted lost revenue from just two weeks ago. Big airlines like Delta, United, and Southwest have been cutting routes and flights left and right.
FINSUM: These stocks have gotten pummeled because of Coronavirus. When is the right time to buy in?
We have ben warning for weeks that as the coronavirus continued to spread, airline and other travel stocks would continue to be wounded (and likely not recover soon). That is happening n a big way today as news of a quarantine in Italy sent markets into a panic about the spread of the disease beyond China. Cruise ships and airline stocks are taking body blows as a result, with Delta and American down 7% and 10% respectively.
FINSUM: These are massive losses, and the worst part about it is that there is unlikely to be a “V” shaped recovery in these sectors, as it will take some time for the public’s fear of the virus (and thus travel) to wane even after things start to get better.