Most Airlines Will Be Bankrupt By May. Trump Promised A Bailout – Time To Invest?
As the world continues to deal with the spread of the coronavirus by closing borders and limiting travel, it’s not surprising that the airline industry has been hit particularly hard.
Last week saw some of the largest U.S. airlines, such as JetBlue Airways, United Airlines, American Airlines, Spirit Airlines and Delta Air Lines, all withdraw their 2020 guidance. Many of these companies are going into survival mode, taking actions such as freezing hiring, idling planes, temporarily laying off employees and halting share buybacks.
This week, CAPA – Centre for Aviation, which provides market intelligence for the aviation industry, warned that most airlines across the world will be bankrupt by the end of May if coordinated government and industry action isn’t taken. Many airlines, which are hit with cancellations and unprecedented drops in demand, are quickly running through their cash reserves.
All of this news obviously sounds very dire, and it is. But as badly as the airline industry has been hit, it appears that the government has their backs.
“We’re going to back the airlines 100% − it’s not their fault,” said U.S. President Donald Trump. “We’ll be backstopping the airlines and helping them very much.
Airlines for America—which is a lobbying group representing airlines such as Delta, United, American and Southwest, has requested airlines receive a total of $50 billion in aid. The group is asking for $25 billion to be paid immediately to compensate for reduced liquidity, while seeking a further $25 billion in the form of zero- or low-interest loans over the medium term.
So where are we going with this? In October 2008, just when everyone thought things couldn’t be any worse for the U.S. financial sector, the U.S. government passed the Troubled Asset Relief Program (TARP). The government bailed out the banks to prevent the industry from collapsing.
The Financial Select Sector SPDR Fund, which is a popular ETF holding many of the top U.S. banks, was collapsing at the time. It ultimately bottomed a few months after TARP was passed in March 2009. Over the next 11 years, up until last month’s selloff began, the ETF gained more than 500%.
Warren Buffett’s Berkshire Hathaway even stepped in during the depths of the financial crisis to purchase $5 billion of preferred stock in Goldman Sachs. The trade netted Berkshire billions in profits. It was the epitome of Buffett’s mantra “Be fearful when others are greedy and greedy when others are fearful.”
As for the airlines, you can purchase shares of any of the individual companies in the sector. There’s also a handful of ETFs that can provide you exposure to the airline sector. The one ETF that is a pure-play on airlines is the U.S. Global Jets ETF. The ETF, which has an expense ratio of 0.60%, tracks mostly airlines but also has exposure to airplane manufacturers, terminal services and airports. Two other ETFs, the iShares Transportation Average ETF and SPDR S&P Transportation ETF, also provide exposure to the airline sector. The airline sector comprises 24% and 18%, respectively, of the funds’ total holdings. The ETF’s remaining exposure consists of companies in the rail, freight, trucking and shipping sectors.
While the airline industry is undoubtedly going through one of its most difficult, if not most difficult, periods ever, there could be an opportunity to pull off a Buffett-like investment. After all, he’s sitting on $128 billion in cash and could potentially provide a lifeline to an airline company just as he did to Goldman Sachs.