Airlines - Which Survive Without Going Through Bankruptcy

[njhowie]

Which is why Southwest will have to follow the big 4? Much irony...

Southwest did not file after 9/11. So, there is the potential that they manage their way out of the current pickle.

It is possible that they will file this time, as they are bigger than at the time of 9/11, have more debt, and plenty more obligations with 737MAX.

 

[Red Badger]

Airlines are pretty high on my stay away from list.

IMO a Bankruptcy pool in potential order of likelihood of sectors getting culled down in size - and which will be avoided in my tiny but personal investing largesse of individual stocks or bonds.

Energy, Oil Exploration, suppliers and rail freight.
Retail Department stores, malls and commercial real estate overall
AIRLINES (only the majors survive and are badly mauled for 3-4 years)
Cruise Lines
Hotel Chains
Car Rental agencies
Restaurant chains
Movie Theaters
Heavily indebted amusement parks
Municipal bonds lacking general revenue taxation
Ship building (Tankers, cruise and freight)
Civilian (small) Airplane manufacture and suppliers
Steel makers
Residential real estate
and hopefully we don't get here again - Financial Institutions

+1. While I could nit-pick, I wont. Most/all of these sectors will incur "choppy air" for a long time.

Perhaps there will be some sunshine in the re-shoring (get out of China) and on-shoring (bring it home) demand that is looming large globally. Also, on another thread, RV's were called out as a bright spot. I agree with that, and believe social distancing will be around long beyond the current pandemic. Perhaps SD will be modified along the way; but for many people, voluntarily getting in a crowded confine of any kind is sooo 2019. Over time, a vaccine may change things. Over time.....


Work travel will be interesting....

"Hey Red, I need you to fly out to our western DC and get a handle on the order fulfillment issue."

"Hey boss, go f@#$ yourself." says happily retired me

 

[brett]

We do a fair amount of flying each year on low cost airlines in Europe in the fall Asia/Australia during our winter. We have to wonder whether any of our favourites will survive. Some are large and have extensive route maps.

The other issue is available routes, and will the supply curve result in increased pricing. I suspect the answer is yes.

Same for non aligned regionals in the North America. We have little to no experience or exposure to them. The NA majors can go the bankrupt route....they are no strangers to it.

 

[targatom2019]

I went long on South West and Alaska at 20K each so will see in 5+ years. There is no way people not flying from point A to point B again and a vaccine will easily solve this problem.

 

[Sunset]

...
3. He sold the entire position in all of the airlines. His stated preferred holding period is "forever". That didn't happen. At the meeting he answered a question saying that individual investors need to be able to handle a 50% (or more) fall or they shouldn't be investing. Hypocrisy after stating 5 minutes earlier selling of the airlines.

...

I don't view it as Hypocrisy as there is a difference between holding something that will go down 50% and come back, vs something that will go bankrupt.

It's interesting that Warren has the guts to admit mistakes, while many funds will buy/sell their contained investments, but they don't publicly state how they lost money on X investment, as it's easy to cover over by the end of the quarter/year.

I was pretty disappointed Warren didn't do at least $10 Billion in buy backs when the stock was down really far, perhaps like many of us, he really worried about a 1929 drop to 5% value.

 

[Freedom56]

Airlines have gone into bankruptcy before and continued to operate while they restructured their debt. Common share holders normally get wiped out and bond holders become equity holders after they emerge from bankruptcy. There is a difference between bankruptcy and liquidation. Liquidation is complete shutdown after an airline fails to reach agreement with debt holders. This is an industry that has used bankruptcy protection many times in the past and will do so in the future. It's a wonder to me why investors buy airline stocks and bonds.

 

[Running_Man]

Agreed. It is simply a matter of which one goes first - industry watchers are fairly confident that American will be the first (US Air, which bought American regularly made use of the bankruptcy process). After that, they will all follow (possibly with the exception of Southwest) - they have to. The reasoning is very simple:

1. All of the airlines carry lots of debt.
   
2. With a bankruptcy filing they get to recapitalize those debts (reduce, eliminate, refinance).
   
3. With a bankruptcy filing they get to break contracts on outstanding plane orders and lease terms on aircraft in their fleet.
   
4. With a bankruptcy filing they get to renegotiate their union contracts.
   
5. When one airline does this, it immediately puts the others at a competitive disadvantage.
   
6. As margins are thin, carrying a significantly higher debt load than the competition means that it is much more difficult to be able to match pricing ... because your financing cost structure is much higher.

American is the perfect example of what happens when you don't follow the others when they do take the bankruptcy route. American did not go the bankruptcy route after 9/11 when the other majors did. As hard as American tried, they could not compete against the others, specifically because they were still carrying all of the debt on the original terms. Ultimately, American had to file as well.

In the Quarter which ended March 31st, Bershire lost 50 billion dollars
https://www.forbes.com/sites/sergeiklebnikov/2020/05/02/berkshire-hathaway-lost-50-billion-last-quarter-as-warren-buffetts-investments-took-a-hit-from-coronavirus/#7109cc4c7fcf

Bershire is sitting on the highest level of cash ever, and he will use it in due course, but he is selling right now not buying. I haven't reviewed their financial statements but I would expect all these airlines to go bust, the required income to service the high levels of debt they have all taken on when they bought back all their shares is going to kill them. I was shocked to see Warren be so brutally honest, "all the airlines have far too many planes and flying will not return to previous levels for a long time".

Southwest spent 6 billion in just the last three years buying stock back at average price of 55 and is issuing new shares in excess of that for 4 billion in equity and convertible bonds that convert at 38.

So the combination of greatly reduced revenues, debt from 2 Billion to 5 billion causes operational issues for even the airline with the "best" balance sheet, which already had been accused of cutting back on maintenance, due to the Boeing Max issue and general financing https://www.cnbc.com/2019/03/27/southwest-cuts-revenue-outlook-on-boeing-737-max-groundings-shares-slide.html

https://talkingpointsmemo.com/news/southwest-airlines-fines-before-deadly-engine-failure
https://www.wsj.com/articles/southwest-flew-millions-on-jets-with-unconfirmed-maintenance-records-government-report-says-11580380201

 

[Chuckanut]

If I owned an airline, I would be financing multiple attempts to develop a vaccine as soon as possible. Same if I owned a cruise ship company, a theme park company or a major 'large events' organizing company.

 

[Montecfo]

If I owned an airline, I would be financing multiple attempts to develop a vaccine as soon as possible. Same if I owned a cruise ship company, a theme park company or a major 'large events' organizing company.

I sincerely hope we get one. But in the near term more effective treatments may be a better bet.

 

[njhowie]

• Airline stocks aren't reacting well to the news out of Omaha that Warren Buffett sold out of the sector at a loss. Buffett said he thinks the airline business has changed and the future is less clear. It's a development that investors are taking as an ominous sign with the legendary investor known for taking the long view.
  
  
• Southwest Airlines (NYSE:LUV) is down 9.68% in premarket action, while Delta Air Lines (NYSE: DAL) is off 9.49%. American Airlines Group (NASDAQ:AAL) is 10.71% lower and United Airlines (NASDAQ:UAL) is posting a 11.08% drop in the early session. Spirit Airlines (NYSE:SAVE), Alaska Air Group (NYSE:ALK), JetBlue (NASDAQ:JBLU) and Hawaiian Holdings (NASDAQ:HA) are also down in 8% to 9% range.

 

[samm]

Old quote: "If you want to make a small fortune in aviation, start with a large one." I'll stick to index funds.

Well said.

A retired airline exec told me that airline stocks are never long-term investments, only short-term trades. I agree.

 

[ExFlyBoy5]

• Airline stocks aren't reacting well to the news out of Omaha that Warren Buffett sold out of the sector at a loss. Buffett said he thinks the airline business has changed and the future is less clear. It's a development that investors are taking as an ominous sign with the legendary investor known for taking the long view.

• 
  
  And I think this could be happening with a LOT of industries right now, not just the airlines. There is not much that is clear right now, and that's a big issue.

 

[atmsmshr]

Agreed. It is simply a matter of which one goes first - industry watchers are fairly confident that American will be the first (US Air, which bought American regularly made use of the bankruptcy process). After that, they will all follow (possibly with the exception of Southwest) - they have to. The reasoning is very simple:

1. All of the airlines carry lots of debt.
   
2. With a bankruptcy filing they get to recapitalize those debts (reduce, eliminate, refinance).
   
3. With a bankruptcy filing they get to break contracts on outstanding plane orders and lease terms on aircraft in their fleet.
   
4. With a bankruptcy filing they get to renegotiate their union contracts.
   
5. When one airline does this, it immediately puts the others at a competitive disadvantage.
   
6. As margins are thin, carrying a significantly higher debt load than the competition means that it is much more difficult to be able to match pricing ... because your financing cost structure is much higher.

American is the perfect example of what happens when you don't follow the others when they do take the bankruptcy route. American and not go the bankruptcy route after 9/11 when the other majors did. As hard as American tried, they could not compete against the others, specifically because they were still carrying all of the debt on the original terms. Ultimately, American had to file as well.

Agreed.

Boeing and Airbus are so screwed on cancelled orders for the next few years. Especially any suppliers that don't have a stake in the defense business to hang onto.

Small size aircraft manufactures are the walking dead among bankrupt corporations.

GE is going to wind up with a cramdown bankruptcy settlement for their aviation division. Uncle Sam may bail them out somewhat since they are strategicly critical for defense.

 

[SAinMinn]

In my IRA, I bought some Delta stock when the 737 Max stuff was hitting the fan, because Delta has no 737 Max jets and, well, because it's the hometown airline.

Regretting the decision now of course, but I have moved the stock to my Roth on the theory there's nowhere to go but up (I'm 53). But we shall see!

Knowing then what we know now, no way I would've purchased the stock. But on the same day, I bought Zoom. So don't feel too sorry for me.

 

[Bamaman]

I saw a picture last week on AL.com. It showed pictures of the Birmingham Airport where Delta has stashed out 100+ aircraft. Every plane's windows were covered, engine covers placed on every plane and tarps keeping all tires out of the weather.

What got me was all the duct tape covering all the little doors and cracks all over the planes. I'd hate to think about all the work it took to mothball these airplanes.

It appears that Delta's preparing for a long term shutdown. They are fortunate that Birmingham has so much storage room as it's just 150 miles from Delta's Atlanta headquarters.

 

[Murph]

In the best of times, airlines are marginally profitable for the extremely capital intensive business they're in.

And it'd be the last industry I'd want to invest in because so few really do a good job at what they do. Think about the customer ratings and opinions of most of the big legacy carriers.

Looks like Virgin Atlantic may be shutting down. Norwegian Air Shuttle's on life support right now. And a number of European carriers have gone out of business in the last year.

And that was before the airline business has essentially been shut down for health reasons.

I was looking at the U.S. map of airplanes in the air last night. Within 150 miles of me, there was a medivac helicopter in the air, and not a single airplane of any kind was up. That speaks badly of the industry. I checked on a famous industrialist's tail numbers of his Gulfstream 450, and that plane has not been flown in two weeks.

Sucks to be in any travel-related business right now, let alone airlines. Yikes.

 

[audreyh1]

Or anything in the live entertainment business!

 

[ExFlyBoy5]

I saw a picture last week on AL.com. It showed pictures of the Birmingham Airport where Delta has stashed out 100+ aircraft. Every plane's windows were covered, engine covers placed on every plane and tarps keeping all tires out of the weather.

What got me was all the duct tape covering all the little doors and cracks all over the planes. I'd hate to think about all the work it took to mothball these airplanes.

It appears that Delta's preparing for a long term shutdown. They are fortunate that Birmingham has so much storage room as it's just 150 miles from Delta's Atlanta headquarters.

That is a terrible place to store airplanes long term. Humidity does a lot harm to the equipment. If it is truly long term, they will be sent to the desert. I imagine there is a lot of haggling going on right now since most of the planes are leased.

 

[fisemper]

flightaware.com, looks like plenty of flying going on. May be less passenger and more cargo. I didn't go into details.

 

[Aerides]

flightaware.com, looks like plenty of flying going on. May be less passenger and more cargo. I didn't go into details.

To get a real feel for the amount of passengers, the TSA daily info (2020 vs. 2019) shows a pretty clear picture - ie yesterday was 140k, same day last year 2.2m


https://www.tsa.gov/coronavirus/passenger-throughput

 

[Rustic23]

I think Buffet sees bankruptcy coming, knows stock holders will be wiped out, and cut his losses. A little bit of something is worth more than a whole lot of nothing.

 

[ExFlyBoy5]

Once one falls, the others will follow suit. I far as I am concerned, it's inevitable. They want to renegotiate equipment (planes) leases and union contracts. I feel very bad for many of my commercial pilot friends. And to think that a mere 3 months ago, they were having issues finding enough qualified pilots.

 

[slingshot]

I may buy into Duct Tape Companies!

I saw a picture last week on AL.com. It showed pictures of the Birmingham Airport where Delta has stashed out 100+ aircraft. Every plane's windows were covered, engine covers placed on every plane and tarps keeping all tires out of the weather.

What got me was all the duct tape covering all the little doors and cracks all over the planes. I'd hate to think about all the work it took to mothball these airplanes.

It appears that Delta's preparing for a long term shutdown. They are fortunate that Birmingham has so much storage room as it's just 150 miles from Delta's Atlanta headquarters.

 

[38Chevy454]

That is a terrible place to store airplanes long term. Humidity does a lot harm to the equipment. If it is truly long term, they will be sent to the desert. I imagine there is a lot of haggling going on right now since most of the planes are leased.

Agree on the desert environment being better for airplanes longer term storage. Long ago in my career I worked for McDonnell Douglas- Douglas Aircraft Co. I was an engineer for building the big passenger jets, although I also helped a little on the smaller military side a bit. There was a saying "if the airplane is flying it is making money, if it is not it is costing money". That was true if flights were reasonably full. Now the airlines lose money flying or parked. Airplanes are a very high capital investment.


BTW, there are many aircraft parked by me here at Wilmington Air Park airport in Ohio, located about halfway between Cincinnati and Columbus. Most of the parked aircraft are Delta.

 

[Rustic23]

I never studied bankruptcy law, but why would anyone buy airline stocks going forward if they are going to declare bankruptcy and wipe out the stock holder every 10 years. Why did Buffet? I can see lending money as this can be accounted for in the interest rate to some extent, and you do end up with a chunk of the company and I would guess a lean on the assets after the dust settles.