The Impact Of Covid On Airlines

After going through a significant contraction during September, S&P500 found support at 3,225 and switched direction North over the past week. The volatility level is still low, and VIX remained relatively stable, despite the heterogeneous information that impacts the markets. Nasdaq recovered and bounced back above 11,000.

Looking forward to November, we should expect an increase in volatility. Gold prices exhibited a small rally and recovered the losses from the previous week, reaching the 1,900 USD level again. Moreover, the first macroeconomic data for the third semester will confirm whether the recovery was strong enough or not. Therefore, the coming weeks should solve part of the puzzle information impacting the market.

A very bad U.S. labour market looks set to deteriorate further. Amid all the talk on how impressive the economic recovery has been, it’s worth a reminder that continuing claims remain almost double the record prior to the March blowout — that’s in data going back more than 50 years. And then Wednesday saw the announcement of tens of thousands of job cuts by blue-chip companies, including Walt Disney and Allstate Corp., the fourth-largest car insurer in the U.S. It’s hard to overstate how desperately the U.S. economy needs more fiscal stimulus. Without it, financial assets will not remain elevated by liquidity alone. Excess cash compels investors to buy assets that offer a minimal return for high risk, but it doesn’t mean they will purchase loss-making or negative-return assets. If corporate retrenchment accelerates from this base level of unemployment, 2021 may make 2020 look a pleasant year for markets

Economics

The world is under a wave of fear generated by the pandemic outbreak and conflated with social unrest and economic gloom. Despite going through a rough period, the West is more divided than ever. The political divide infiltrated not only the societal debate but also science, technology and business. Developed economies are facing both recession and secession. How should investors analyse this information in the current market environment?

The equity market is at the same level where it was last year when the global economy showed a bubbling growth. Most analysts believe this is a temporary situation generated by the money printing strategy of the central banks. According to the same analysts, markets should go through a massive dip in the near future. But what if markets are right? It would mean that markets do not value the current state of the economy but a future state which would be significantly different. The pandemic increased the inequalities in many aspects, including economic, technological and social. Societies of developed countries are divided into two sides.

On the one hand, we have a progressive side, involved in technology revolutions, highly educated with the sound finances, that seems to thrive even during the pandemic. On the other hand, we have a more amorphous side, depending on governmental subsidies, with low education and working in sectors hardly hit by the pandemic. The last is touched by recession while the latter may look to a secession. Markets might price the state of the progressive side in a two-speeds society and ignore the other side. The theory of a two-speed society came to light amid the Eurozone crisis but may be put in practice in the midst of the pandemic.

Airlines

Airlines have felt the pain of the coronavirus more than other companies. Almost overnight the bulk of their business ceased. But in mid-2020 there was at least hope that Covid might not be as virulent as first thought; that warmer months would bring some respite; that travel corridor agreements allowing passengers to fly between two countries without quarantine might not get people back in the air.

Now, almost eight months into the pandemic, with cities reentering lockdown and a vaccine likely months away, it’s apparent there will be no quick comeback. International air traffic in July was 92% below 2019 levels, International Air Transport Association figures show. More than 400,000 airline jobs have been cut since February, according to data compiled by Bloomberg. People are not going to get back and travel as they did before until there’s a vaccine that’s been widely distributed.

British Airways CEO says the airline is “fighting for survival” and said it’s restructuring or die. Airlines in the US are expected to layoff thousands of additional workers when the coronavirus aid expired at the beginning of this month- with over 29,000 already laid off by United Air.

In Europe, a pickup in air traffic in July and August, as vacationers sought to escape monthlong lockdowns, has abruptly gone into reverse. Lufthansa is preparing for deeper job and fleet cuts. According to IATA, 25 million jobs are at risk. More staff reductions are coming. Losses in Asia-Pacific meanwhile seem small. That would indicate Asia may be on the cusp of a torrent of cuts. Government aid has helped, but there may not be more thy a do. Carriers in Europe alone received $29 billion in aid, state-backed-loans, and other forms of support through Aug 27.

With airline stock prices plunging, attracting fresh investment is getting harder. Warren Buffet has completely exited his stakes. Richard Branson’s Virgin Atlantic is undergoing a £1.2 billion rescue built around a loan from a hedge fund. The pandemic is pushing airline Virgin Australia into the hands of private equity. In the US, Delta was able to raise 49 billion in the industry’s largest-ever debt sale. America airlines sold $6.8 billion of debt in June. Aircrafts are in a crisis of their own. A third of the world’s 26,000 passenger jets remain grounded, packed in deserts or lined up in rows along the tarmac, aviation data provider Cirium says.

Fleet reductions are squeezing plane makers. Airbus received only one order in August, and Boeing is fighting to stop cancellations of its 737 Max, which was grounded after two fatal crashes. Airlines are also seeking to defer previously ordered planes. Corporate travel may never recover as business-people everywhere realise they can close deals and get the job done over Zoom and from home even. Leisure travel is expected to spring back once there’s an effective vaccine, but tourists will probably be more cautious. Jaunts to far-flung places where medical help is remote may hold less appeal.

Wizz Air Holdings relaunched services more aggressively than any other European carrier but has since hit the breaks, freezing capacity plans for the fourth quarter at current levels. Norwegian Air Shuttle ASA has dumped its signature model of low-cost transatlantic flights until at least next year.

After cutting planes, pilots, and crew, airlines are tearing into ground servicessuch as baggage handling as well as fixed costs such as property. Qantas has said it may shiftiest Australia-wide property review.

Head of Portfolio Management @ Imperial College Investment Society