Airline stocks. Set to soar or a crash investigation site?

Vietnam is still managing to keep a firm grip on the C-19 virus overall and I am sure, proud that it hasn’t logged any domestic infections since April 17. With all C-19 patients confirmed after this date arriving as imported cases and all through air travel. The most unfortunate recent case being 31 people on a flight from Russia, including two flight attendants.

It does highlight the risks of air travel. After all you are sitting in a tin can where if there is a presence of C-19, you don’t really have much of a chance of avoiding it. There have been some rather unusual attempts to bring social distancing on flights and rather unamusingly, some effort to profiteer from this fear.

I introduce to you the absolute ridiculous attempt by Frontier Airlines, a domestic carrier in the USA who thought it would be a good idea to charge passengers an extra $39 fee to sit next to an empty middle seat! You can imagine the reaction to that ridiculous suggestion. Concerns were very quickly voiced with the chairman of the House Transportation Committee calling it “outrageous.” Peter DeFazio, D-Ore., said the Denver-based airline was using the need for social distancing during a pandemic “as an opportunity to make a buck … capitalizing on fear and passengers’ well-founded concerns for their health and safety.”

Same author: Covid Quarantine winners. Investing after the pandemic

The CEO of Frontier Airlines tried to defend the fee by suggesting that this was a charge for “extra room” but naturally everyone saw straight through this, as nothing less than pure profiteering in light of a pandemic.

There have had been airline scalps taken already in the form of Virgin Australia (“VA”) and unfortunately for Richard Branson, he has been plunged head-first into the limelight again for all the wrong reasons. The reality is, is that Branson only owns 10% of VA with Singapore Airlines and Etihad Airlines owning 20% and 21% respectively.

The rest is owned by HNA (20%) and Nanshan (20%) with a free float of 9% to “others”. It is the shareholders of that small percentage that are the ones you have to feel for. There are only 3 domestic carriers of note in Australia, so to lose one would be quite drastic to keep a free market and pricing down on domestic flight travel in Australia.

It isn’t game over for VA as even the Queensland Treasurer came in to defend a possible takeover of the carrier with a bid of 200 million AUD. In reality they don’t have the liquid funds for this kind of venture and it would be a disaster for them to get involved in a carrier as it would raise questions on fairness for a Government owned Company against that of the private sector. But you do have to appreciate the effort to consider protecting jobs. The Government pays one way or another as it will only end up paying social security payments paid for by the Government if all those VA employees did end up on the unemployment line. And naturally the tax-payer ultimately foots that bill anyway.

There are a number of bids coming in elsewhere and a good four of them look reasonable and solid. Virgin may be down but certainly not out. Not yet anyway. Liabilities/debt would have to be wiped clean though which doesn’t help existing share-holders. Such is the nature of ownership and risk.

Vietnam has 6 carriers and those that concentrate on domestic flights will fare better in the short term with many borders closed or having major restrictions to travel across. All carriers around the world have been running on as low as 5% normal capacity which is mind blowing when you consider the costs associated with a grounded air fleet. No corporate income, but the bills haven’t gone away. Billions of losses are being generated every week. Just finding space to park can be a problem, and idle planes require a surprising amount of work, from maintaining hydraulics to stopping birds from nesting.

With the unprecedented number of aircraft grounded globally, the question is where to put them. Naturally enough, airlines are trying to keep the grounded planes close to home. Taxiways, maintenance areas, terminal areas, and in some cases even runways, are being used at airports throughout the world. Almost 10,500 aircraft, representing 40% of the global fleet, have been grounded already and that number is only likely to increase.

Parking costs must also be considered. Some airports, including Heathrow and Charles de Gaulle Paris, are waiving fees but many others are not. IATA has written to transport ministers around the world requesting that airports help cash-strapped airlines by cutting parking fees.

But there are green shoots of the market starting to see some return to travel. It will take a long time to get back to any kind of real normality, years even. But these are the kind of stocks that you if you are a long-term investor you almost certainly want to be holding in your portfolio.

Quite often I listen to some of the better-known names in the markets bang on about how they are long term traders. Yet they have dumped all off their holdings in airline stocks. Warren Buffet is one of these with Berkshire Hathaway selling off every single airline stock they were holding but only after the horse has bolted with stock prices bottoming out. That doesn’t make him a long-term trader, it makes him a day trader. Others however have seen sense and done the absolute opposite. The Saudi Sovereign Wealth fund which is valued at an eye watering $320 billion just bought $713.7 million into Boeing which has taken an absolute battering in recent months. These stocks are so undervalued currently it does make sense to buy and hold if you don’t mind waiting for a good amount of time and with that the returns will be great. No one will deny that airlines will return to good passenger numbers and streamlined business models.

There are other industries that also fall into this longer term bracket so you wouldn’t place a large amount of your portfolio in them purely, but spread funds out and take more advantage of the assets that are more likely to move in the shorter to medium term. You certainly shouldn’t dump them all! Diversification is always the key to success.

There may well be plenty of mergers and acquisitions coming and there may be more scalps to be taken as one of the hardest hit industries from this pandemic.

One thing I do know from my 30 years in trading, is that when things start to move, and they will, they do so with lightning speed. The end story? Buy a small percentage and sit on them for a rainy day.

If you are looking for portfolio management from an existing portfolio or require starting one, please do get in touch with Vietnam’s leading wealth manager on my email lawrence.young@holbornassets.com

Lawrence Young, The Author

Lawrence Young (lawrence.young@holbornassets.com) works for Holborn Group, he is now based in Vietnam office. His areas of expertise lie in personal, lump sum or regular monthly premium tax free savings structures, global investment property, higher education fee planning, inheritance tax issues, frozen and open pension planning through ROPS or SIPP’s, life and general insurance, will writing services and offshore company formation and banking.