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A Small Ray of Sunshine for the Airlines

By Paul J. Carroll, CFP®May 20, 2020December 1st, 2023Videos

So Boeing CEO, David Calhoun, last week really threw the airlines under the bankruptcy speculation bus with his comments. And yet recently we have had some rays of hope. There’s been a lot of bleak news for United recently. Delta, back in April, tried to issue $5 billion and got it for 7%. The United bond yield fizzled, despite raising the interest rate up to as much as 11%, and securing it with 360 – albeit older – aircraft. The market – I don’t know if it was a reflection on United or reflection on the markets feeling that those, the older aircraft, probably have little or no resale value after factoring in the value of the engines.

Warren Buffet at his recent presentation announced that he is heading to the hills with respect to the airlines. He has sold all of his airline investments, and is pretty much running with his tail between his legs. Warren has never liked airlines. He has gone against his better judgment and bought them, and never done well with them. Jamie Baker, the airline analyst at JP Morgan, has talked about June and cash and Southwest is in the best position. Then Delta, then United, and picking up the rear is American Airlines. If there is just one airline that goes bankrupt, it will probably be American Airlines. United Airlines, during the quarterly earnings call, has been refreshingly blunt and honest. American’s comments have pretty much spooked the analysts.

Unfortunately. then we reached Avianca’s bankruptcy. That’s a significant loss for United, both an investment and also in connections. That tie-up may be lost. Time will tell. Yesterday we did get our first ray of sunshine. TSA numbers show there’s an increase in travel. United Airlines is seeing not just a reduction in cancellations, but an uptick in bookings. And they’re forecasting still about a 70 to 75%, in July, year over year bookings. That beats the hell out of 95% back in April. These are not great numbers.

If you want to speculate, and this is the big word, “speculate.” If you’re looking for a speculation opportunity with the airlines, there is an ETF out there called JETS – Juliet, Echo, Tango, Sierra. This is not an investment recommendation, but for the speculators, it’s a play on the airlines. Certainly it’s more diversified than putting your bet in any one airline. But for the rest of us, if you’re looking at the stock market right now, you are looking at historic highs. Yes, we’re at 10-plus percent below the highs of earlier in the year, but as a multiple of earnings – both past and future – this market is extremely rich. It looks much more like 1999, 2007, than 2019. Not only is the outlook quite bleak for the economy, even if it gets to 90% by the end of the year – 90% is a big hit to the bottom line for these companies. Interest rates, grant you, have fallen and that can affect markets. But not to the extent that we’ve seen. So my parting shot would be careful. This is a fragile market. It is still very much likely to be a dead cat bounce. We wish you the best of investing success.

Founder & CEO at Avion Wealth

Paul is the founder and CEO of Avion Wealth, LLC. He leads a team of wealth managers in building and executing financial plans for high net worth individuals and families. Contact Avion Wealth to speak with a financial advisor.