Investors Get Ready for Take Off
Warren Buffett dumped his airline stocks last month. Little did he know the rocket fuel sitting underneath them. The US Global Jets exchange-traded fund (ETF) is on a 65-day inflow streak. It’s day trading central for bored millennials in lockdown!
Citibank believes every 1% impact on global travel has a 10% impact on airline profits. Many airlines used chapter eleven after 9/11. At that time, air travel dipped 30% for three months. The sector owes governments big-time to still be in business right now. We face two years of <50% demand compared to 2019, according to the Civil Aviation Authority.
The market expects unlimited federal aid; there can be no other explanation for the recent stock surge. If you run a country, you need an airline as essential infrastructure, so governments have no choice but to grant bailouts. Airline investors are living on them!
However, the bear case for airline stocks is that this state funding needed to support multiple airlines for multiple years will be off the charts. It can’t be there for all carriers, and those get it will have no choice but to restructure under its weight. The capital structure for said airlines will reshuffle, and the state (the debtor) will take everything.
If the insiders are right, we’re months – not years – away from all the airlines you know going through this bankruptcy process (the third or fourth time for some). The better ones are on a slow path to nationalization. The less good ones are toasty.
The bulls in this space are betting on either a v-shaped recovery in air travel saving the day or governments deciding that selective aid isn’t fair. It could be that taxpayers’ money is offered in grants and no-recourse loans that keep everyone in business. All to come!
