RE:RE:RE:RE:RE:RE:RE:RE:US peer Delta bleeding badly logicaninertia, here are my responses to your concerns (bold/italics)
Recessions or black swan events like this are game changers.
Totally agree! The rapid rise in oil prices in 2008 was a game changer for the airlines, many of which were caught off-side on their fuel hedges. However, the change in mindset among airline CEOs that came out of this event was flying larger aircraft over longer distances. Today both Boeing and Airbus are selling aircraft that are much more fuel efficient, and with higher density seating and longer stage lengths the fuel cost per available seat mile is down significantly. Another change in mindset that came out of the great recession (and bankruptcy protection) was a focus on return of capital. Instead of competing for market share, CEOs began focusing on profitable growth, doing more with less.
One change in mindset that will come out of this crisis, especially for the U.S. airlines will be the amount of cash they carry. I follow the NA industry closely and always thought it odd that the U.S. carriers, particularly Delta, were carrying so little cash. I recall last year on an earnings call, one U.S. analyst asking the Air Canada CFO why the company was carrying so much cash. It was seen as inefficient.
Another change in mindset resulting from this crisis, is likely reduced capacity. Both United and Delta CEOs have already hinted at this to their employees over the last few weeks. The upside of reduced capacity will certainly give the carriers more pricing power.
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).
True. However, what really matters is liquidity during any kind of crisis, and Air Canada has the highest liquidity level of any NA carrier. The question of course is how long will Trump and other world leaders allow their economies to be shutdown?
I read one of your previous posts on independent restaurants (Back to 2009 Crisis Levels, March 21, 2020) and totally agree with your comments. The subject was independent restaurants and you commented that because most only carry 30-45 days of cash reserves:
“the government will have to step-up testing and mandate older people to be very careful, but ultimately re-open the economy. Ruining large swaths of the economy by keeping them closed is not something the public will allow for too long. All the employees in the hospitality industry would be destitute. On the other side of this many smaller chains/franchisees will be out of business. The survivors will have a chance to increase share in the CDN market.”
The conclusion you came to (mine as well) is exactly what Sweden has done, instead of following the rest of the world. They implemented a few social distancing protocols, but their focus was primarily on protecting those most vulnerable. Denmark, on the other hand, chose the same path as most other countries, including Canada. To date, Sweden’s corona virus deaths total 401 (population 10.12 million) while Denmark’s total is 179 (population 5.6 million).
The latest models from the IHME (a reputable research institute founded by Bill and Melinda Gates) project that the US will reach less than ten deaths per day between May 30th and June 6th. These models are updated daily and are one of several driving the decision making in Washington. There is no way the US will be able to justify continuing the economic shutdown with fewer than ten COVID-19 deaths per day. Likewise, by then, the majority of Asia and Europe, who are mostly ahead of us in their own curves, will be in an even better state.
Lockdowns will be replaced with continued mild social distancing along with rampant testing and contact tracing, but the world will begin to open up.
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.
I have to disagree with you. While Air Canada did turn a profit in 2007, it was in a demand driven economy. The Airline’s EBIT was 4.7%, Total Debt to EBITDA was 4.2x, and free cash flow was a negative $2,233 million. Like most airlines at the time, Air Canada’s earnings, even after the cost-cutting that occurred during bankruptcy protection, were still highly sensitive to the whims of the domestic economy because of its less than optimum capital structure. Totally different company going into this crisis. Both operating and financial leverage significantly lower than was the case in 2008.
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.
How would one determine that he hasn’t deployed capital? BRK sold 18% (13 million shares) of DAL and 4.3% (2.3 million shares) of LUV to reduce his holdings to under 10 percent, so he would not have to report his actions with two days. Moreover, the sales were disclosed shortly afterthe U.S. airlines applied for payroll grants from the U.S. government as part of the Cares Act. This timing is no coincidence, and it will be interesting to see how this plays out in the coming weeks.
Just a few weeks ago, Buffett told Yahoo finance that he wouldn’t be selling his Company’s stake in Southwest and Delta. BRK still owns 59 million shares in Delta and 51.3 million shares in Southwest. Also, Buffett earlier this year on CNBC stated that he would not buy an airline outright but that he would like to own more of all the companies BRK has invested in, including airlines. His purchase of Delta shares in March seems to back-up his comments on CNBC.
So the coronavirus has created a crisis in the industry, and the question is what are the new opportunities for BRK as far as airlines are concerned? Does BRK still own American and United? Highly leveraged American was the only major carrier to also accept U.S. government backed loans on Friday. Now that BRK has reduced LUV and DAL holdings to under 10%, we’ll have to wait until May to find out what Buffett is up to. My guess is BRK is going to still own airlines, it’s just a question of which ones, and how much.
Logicandinteria, your first post on Stockhouse Air Canada was Friday night, shortly after BRK released the information on the sale of Delta and Southwest shares, so I can only assume a possible complete sell-off of U.S. airlines by BRK is something you see as likely, and that that will impact airline share prices on Monday. If a sell-off does occur it will only be by fearful investors. I hope I have provided an additional perspective in my two responses to your previous posts.
A couple more points….
In my response yesterday I forgot to address your comment on debt re-ratings, and the fact that Delta’s credit rating was higher than Air Canada’s going into this crisis. That is true. Delta was investment grade, but Air Canada was one level below and was expecting an investment grade rating within the next few months based on end-2019 financials. That said, I expect Moody’s is reviewing all airlines with the likelihood of potential downgrades on debt. This is to be expected, and even if Air Canada’s debt is downgraded, it is still on solid ground.
Finally, I mentioned that algorithmic trading platforms are finding it more and more difficult to acquire Air Canada shares. Specifically, it appears that the ‘algos’ are doing more and more shorting (costly for them) to keep the price within a range they can maximize net accumulation. This past Friday’s buying seems to have been a costly day for them. Around 11 am, just over 450,000 shares were shorted to bring the price down from the mid-14s to $13.60-13.80 range where additional shares were then acquired. Usually the dominant algo is able to keep that price range in-tact for the remainder of the day. However, in the afternoon the dominant algo lost control of price management when significant buying from other funds (competing algos?) and retail investors began pushing the price back into mid- to high- $14 range. Costly day.
I suspect the institutional traders will use the Buffet sale of DAL and LUV to spook some small investors into giving up their shares tomorrow.