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People are looking "hit it big" in the stock market.
Covid-19 has beaten down a few industries to low share prices.
A prime example of this are the major 4 US airline companies
Are these stocks an opportunity, or value trap?
[A THREAD]
Covid-19 has beaten down a few industries to low share prices.
A prime example of this are the major 4 US airline companies
Are these stocks an opportunity, or value trap?
[A THREAD]
1.
When we talk airlines, we are of course referring to:
Delta $DAL
Southwest $LUV
United $UAL
American $AAL
Each stock has fallen drastically since the Covid outbreak, and remain depressed.
Many investors are interested in a potential rebound story.
When we talk airlines, we are of course referring to:
Delta $DAL
Southwest $LUV
United $UAL
American $AAL
Each stock has fallen drastically since the Covid outbreak, and remain depressed.
Many investors are interested in a potential rebound story.
2.
However there are some serious challenges ahead.
First, let's talk air traffic.
The International Air Transport Association recently projected a recovery of global traffic taking until 2024
To recover to pre-Covid levels.
This causes multiple pain points for airlines.
However there are some serious challenges ahead.
First, let's talk air traffic.
The International Air Transport Association recently projected a recovery of global traffic taking until 2024
To recover to pre-Covid levels.
This causes multiple pain points for airlines.
3.
Airlines to begin with, operate in a very tough industry.
Pricing is ultra competitive, so there is no pricing power.
In addition, the business is very capital intensive.
Aircraft acquisition, upkeep, and operation is very expensive.
Airlines to begin with, operate in a very tough industry.
Pricing is ultra competitive, so there is no pricing power.
In addition, the business is very capital intensive.
Aircraft acquisition, upkeep, and operation is very expensive.
4.
To make matters worse, costs are very fixed.
It costs roughly the same to fly a plane filled with people,
As it does a plane at half capacity or less.
When planes have empty seats, profitably suffers.
The sharp drop in traffic is causing airlines to bleed cash.
To make matters worse, costs are very fixed.
It costs roughly the same to fly a plane filled with people,
As it does a plane at half capacity or less.
When planes have empty seats, profitably suffers.
The sharp drop in traffic is causing airlines to bleed cash.
5.
How much cash?
As of the latest info from the airlines, they are losing anywhere from $27-$40 million PER DAY.
The burn has slowed as airlines cut costs, and there are hopes that cash burn will cease by the end of the year.
However
How much cash?
As of the latest info from the airlines, they are losing anywhere from $27-$40 million PER DAY.
The burn has slowed as airlines cut costs, and there are hopes that cash burn will cease by the end of the year.
However
6.
There are two additional worries here.
- This won't stop depreciation of assets, which will further drive losses on earnings.
- The cash flow projections don't account for the payroll support currently being provided through CARES act.
There are two additional worries here.
- This won't stop depreciation of assets, which will further drive losses on earnings.
- The cash flow projections don't account for the payroll support currently being provided through CARES act.
7.
In other words, it will be nearly impossible for airlines to be profitable as long air travel is depressed.
Without massive cash from the government (current support expires in September), the airline stocks will be worthless in a matter of time.
So what could happen?
In other words, it will be nearly impossible for airlines to be profitable as long air travel is depressed.
Without massive cash from the government (current support expires in September), the airline stocks will be worthless in a matter of time.
So what could happen?
8.
The airlines could go bankrupt, being allowed to shed debt and restructure. This has happened before many times.
If this happens, shareholders are likely wiped out.
On the other hand -
The airlines could go bankrupt, being allowed to shed debt and restructure. This has happened before many times.
If this happens, shareholders are likely wiped out.
On the other hand -
9.
If the government keeps them afloat,
Politics get involved, and handcuffs could be placed on the companies that prevent shareholder friendly activities for as long as they owe taxpayers money.
In either case, the outlook is grim for investors.
If the government keeps them afloat,
Politics get involved, and handcuffs could be placed on the companies that prevent shareholder friendly activities for as long as they owe taxpayers money.
In either case, the outlook is grim for investors.
10.
For these reasons, airline stocks are very risky investments.
It should not be assumed that a recovery is a "matter of time",
Because the current situation points to an eventual wiping out of shareholders as being more likely.
For these reasons, airline stocks are very risky investments.
It should not be assumed that a recovery is a "matter of time",
Because the current situation points to an eventual wiping out of shareholders as being more likely.
11.
What do YOU think?
Are airlines something that you are looking at?
Or do you agree that they are likely to crash?
What do YOU think?
Are airlines something that you are looking at?
Or do you agree that they are likely to crash?
