Thank you for your response Airlineinvestor.   It is clear a bunch of you guys are really eager and do hard work to understand things.  Unfortunately, these black swan events erase any good work done by you or your investee companies, such as Air Canada.   They become dangerous situations, and retail investors who can’t read balance sheets or leverage ratios should be wary of betting on highly leveraged industries like airlines, casinos, cruise lines, etc., as we move into recession and retrenchment.  Why? Because most don’t understand how insidious debt becomes to equity value during a downturn with big cash burn.  

 

SHare price declines (peak to trough) Last 12 months:

 

MGM : -70%

Norwegian: -84%

Carnival: -85%

 

Delta:  -68%

American AIrlines:  -74%

United Airlines: -78%

Air Canada: -72%

 

Recessions or black swan events like this are game changers.  It matters not that MGM generated great money in Vegas and Macau for the past five years, improving their debt structure and cleaning many things up.  The share price has just fallen from $36 to $10.   Nobody cares that Carnival and Norwegian put up terrific numbers for years.  Same thing goes the airlines.   The cleaned up labor issues, monetized credit card relationships, consolidated, outsourced regionals and generally did a fine job.   Doesn’t matter now.   What do they have in common?   Heavy fixed asset businesses that require almost 24/7 asset utilization (casinos, planes, cruise ships).  

 

THe same thing happened in 2007/2008, where we saw cost of capital rise precipitously, meaning highly leveraged businesses saw permanent capital impairments.  The airlines actually weren’t even hurt that bad, as compared to this cycle, when their assets are literally parked.   THis will be so much worse.  How did things fare in 2007/2008 for the leveraged airlines/casinos/cruise ships?

 

In 2008, MGM Resorts went from $89 to $0.89, and by 2014 was back up to $25.  The equity stub in 08/09 was just a call option versus a potential bankruptcy, which was averted.  Carnival went from $51 to $20 in 2008 and only got back to that $50 level in 2015.  Delta went from $21 to $3 in 2008 and never regained the $20 level till mid 2013.  

 

Air Canada had a good year in 2007, touting their achievements.  In 2008, the share price declined from $21 to under $1, and never exceeded $5 until late 2013. 

 

The capital impairment was somewhat permanent.    So please view Air Canada from a balance sheet perspective, and if you have no clue what you are looking at, don’t speculate in Air Canada right now.   Remember that Air Canada’s two best ever years were the last two, generating a whopping $3 billion in free cash flow.   THis will be burned thru in the “first six months of 2020”, according to a dated report by National bank (it could be worse).   The stock, interestingly, has gone back to late 2017 levels (erasing 2018 and 2019 gains).  Probably logical.  And every month this lockdown remains in place, I believe another $900 million is being burned thru (or $3.42 per share in equity value).  THis is potentially permanent impairment that will take years to regain.   Questions for when we exit Corona lockdown:   When will business travel return?  Will the Asian routes remain strong?   Will the Trans-Atlantic capacity glut get worse?  What assumptions do you have to make to see AC getting back to break-even?

 

Warren Buffett went into this crisis sitting on $126 billion in cash.   He never sells at the bottom, and typically is the buyer.   So far, he hasn’t deployed capital and just sold some airlines down over 50%.   You can twist your mind to believe this is somehow bullish but as you will see when airlines trade on Monday morning, it isn’t.    If Buffett saw a V-shaped recovery, he would want to own the most levered assets, and leverage (up and down) is close to highest in an airline...

 

Keynes observed, “When facts change, I change your mind.”   In the past six weeks, EVERYTHING has changed. 

 

As a retired institutional professional, I try to help the retail investor when i see the opportunity.  I hopefully educated some of you on understanding capital structure and the threats/opportunities faced by the equity holder when the economic tide goes out and the debt/leverage  holds the cards.  Good luck to all and I’ll let the bulls and bears fight it out here.  Adios.