On July 21, 2020, United Airlines reported their 2nd quarter 2020 earnings results, writing candidly that this was “the most difficult financial quarter in its 94-year history.” United posted a net loss of $1.6 billion, and an adjusted net loss¹ of $2.6 billion. (The difference between the two is largely due to the receipt of $1.5 billion in the Payroll Support Plan of the CARES Act.)
Airline Revenue is Down 86.4%
American Airlines’ 2Q 2020 revenue was down 86.4%, from $11.96 billion in 2019 to $1.6 billion this year. The net loss was $2.1 billion. Without the Payroll Support Program, $1.8 billion of financial assistance and other special items, American Airlines’ pretax loss was $4.3 billion. The 3rd quarter isn’t expected to be much better. American projects “system capacity” to be down approximately 60% year over year. United, Delta, Southwest and Alaska Airlines all reported year-over-year revenue losses of 81.6% to 88.3%.
Loans, Blank Checks and Taxpayer Bailouts
With so many grounded flights and with the Oil Wars that took oil costs negative for a brief period, fuel costs were down almost 90% in the 2nd quarter for the airlines. Labor costs were still high, however, due to the terms of the Payroll Support Program (PSP) of the CARES Act. As Airlines.org President & CEO Nicholas E. Calio wrote on April 14, 2020, the PSP “funding will allow those 750,000 men and women to stay on airline payrolls though Sept. 30, 2020, and out of the unemployment lines.” American Airlines anticipates having over 20,000 more team members on payroll than needed to operate its fall schedule.
With over 10 million employees and a combined $1.5 trillion in economic activity in 2019 (per Airlines.org), the aviation industry is a priority for the Treasury Department and Federal Reserve Board’s rescue and recovery plan. However, investors are reticent to buy back into airlines stock, with the exception of Boeing, which has almost doubled since its low on March 23, 2020.
Warren Buffett was an avid airline investor pre-coronavirus pandemic. In 2019, Berkshire Hathaway owned 11% of Delta Airlines and 9% of Southwest and United. Buffett dumped all of his investments in airlines in May of 2020 stating, “The world has changed for the airlines. It’s been seven weeks since I had a haircut and more than seven weeks since I put on a tie.” Many of us are rarely leaving home, much less jumping on a plane. Buffett acknowledged that his team had invested $7-8 billion in airlines, and sold for a loss.
Work From Home and Restricted Travel
Some corporations, like Facebook, Twitter and Square, have already decided that Work From Home will become a permanent staple of their business. Executives have become more accustomed to video conference meetings. These changes bode well for technology, and less so for airlines, auto manufacturers, commercial real estate, the malls of America, travel, hospitality, retail and the people who work for them. However, with Zoom Video trading with a PE of 1450, Netflix with a PE of 85 and many technology companies at all-time high prices, even the more stable companies and industries are vulnerable to a downturn in stock prices.
The airlines have been beefing up their war chests. American ended the second quarter of 2020 with $10.2 billion, and is projecting a U.S. Department of Treasury CARES Act Loan in the amount of $4.75 billion to close in the 3rd quarter of 2020. Will this be enough, when current liabilities are $18 billion and long-term debt and liabilities are $68 billion?
Boeing’s liabilities are $152 billion, with $94.5 billion of those current. As of the 1st quarter of 2020, cash and cash equivalents were just $15 billion. The terrible year that airlines are having doesn’t bode well for the already beleaguered Boeing. Boeing announces their earnings the morning of Wednesday, July 29, 2020. With commercial aircraft deliveries down by 60% and Defense Space & Security deliverables down 47%, the report won’t be pretty.
Investors won’t be the only ones waiting for this report. The Securities and Exchange Commission has taken an interest in forensically examining Boeing’s financials. On June 2, 2020, the SEC instructed Boeing’s executives to provide more information in the next earnings reports, writing, “As cancellations are now at significant levels, please be sure to include robust quantified and narrative disclosure of the expected impacts to your backlog, results of operations and cash flows in your future filings.”
The Paycheck Support Plan is Scheduled to End September 30, 2020
Will Congress extend support to the airlines through March 31, 2021? Should the airlines be allowed to right-size their operations and furlough hundreds of thousands of employees? Unions for airline pilots, flight attendants and support personnel are all asking for continued labor support. Treasury Secretary Mnuchin supports continued aid to the airlines, but the loan covenants are not as strict about targeting the funds to labor as the Paycheck Support Program was. Last week United and American both announced furloughs totaling 61,000.
When will people start flying again? Will we ever return to the same levels of travel? Has work from home and video conference meetings changed the travel industry forever? Would it be better to support American individuals rather than continue to funnel money through the large corporations? The Treasury Department is currently working on getting another $1200 by August to individuals earning under $75,000/annually.
2Q 2020 GDP Growth
On July 30, 2020, the Bureau of Economic Analysis (BEA.gov) will release the advance estimate for 2nd quarter GDP growth. The contraction is predicted to be unprecedented. Estimates for just how bad it will be go as low as -35%. Stocks were high-priced before the recession began. The Treasury Secretary, the White House and Republicans all point to a better than expected recovery, rather than the terrible economic news. Is that a good reason to pay twice as much for stocks as normal?
A Better Than Expected Recovery?
The headlines have focused on the idea that the astonishingly terrible earnings news in the 2nd quarter of 2020, which is one for the history books, was expected and that we’ve already started a recovery. However, this recovery is based on money magically showing up in the bank accounts of people who are not working, including millions of airline employees. Betting on a V-shaped recovery, when July marked a new spike in the pandemic, could be an expensive proposition. Warren Buffett’s recent sell actions tell you everything about what he believes is the truth of this heartbreaking and challenging time. He didn’t sell everything, and neither should you. Market timing doesn’t work. However, he is well-diversified, and he is overweight in liquidity.
The Stock Market is Not the Economy
We all want an economically strong America, and for our lives to be stable and prosperous. However, Buy & Hope has cost investors more than half of their wealth in the last two recessions. Low interest rates create bubbles and over-leverage. Over-leverage in technology companies sparked the Dot Com Recession, with real estate being at the core of the problem in the Great Recession. All assets are trading high and at risk of price correction in the Corona Virus Recession. Bonds and dividends, which are traditionally considered to be safer, are losing money, cutting the yield and have at times been illiquid.
Succeeding in the 21st Century requires a new action plan. Fortunately, there is a plan that earned gains in the last two recessions and has outperformed the bull markets in between. Better still, it is easy as a pie chart. Being properly diversified and having enough safe has been a wealth preservation tool. And that is something you should want to get familiar with now before the corporate bankruptcy party moves out of the Retail Apocalypse and into the broader economy.
If you'd like to protect your wealth now, join me at my next Investor Educational Retreat. Students receive a large discount. Click on the banner ad below for additional information on the Oct. 3-5, 2020 Online Financial Empowerment Retreat. Register by July 31, 2020 to receive the best price.
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Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.
ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.
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Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She blogs on Huffington Post and Medium, and is a frequent guest contributor to national news shows and magazines. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.