• Market Crumbs

Tough Times For The Airline Industry

Image via JC Gellidon on Unsplash

Amidst the coronavirus outbreak, it's hard to find a sector that hasn't been negatively affected. As cities and countries across the world go on lock down, people have obviously been much less inclined to travel.

As a result, the airline industry has been one of the most severely impacted by the coronavirus. The coronavirus is affecting airlines globally, but things took a turn for the worse for U.S. airlines this week. JetBlue Airways, United Airlines, American Airlines, Spirit Airlines and Delta Air Lines all withdrew their 2020 guidance this week as travel craters.

Delta, the world's largest airline by revenue, cut international flights by up to 25%, while cutting domestic capacity up to 15%. Delta also announced it will offer voluntary, unpaid leave, freeze hiring and halt stock buybacks, as well as delay $500 million in capital expenditures and $500 million in voluntary pension funding.

"We expect demand erosion to continue in the near-term and have built a plan that prioritizes free cash flow generation and preserves liquidity," Delta CEO Ed Bastian said. Bastian gave a glimpse of the damage, saying Delta saw a "25% to 30% decline in net bookings and are prepared for it to get worse."

Most major airlines appear to be following the same playbook to handle the pressures facing them—cutting capacity, suspending routes to areas that have been heavily affected, slashing capital expenditures and raising funds via financing. Southwest Airlines CEO Gary Kelly is even taking a 10% pay cut as the sector faces headwinds.

"Given all the news and near-panic about the virus, none of this is shocking; but the velocity and the severity of the decline is breathtaking," Kelly said. "There is no question this is a severe recession for our industry and for us. And, it is a financial crisis."

With the industry reeling, U.S. President Donald Trump is trying to reassure airlines he has their backs. "They’re taking very, very strong steps for people coming into our country, even getting off the planes," he said of the airlines. "So we are working very closely with them, we’re helping them. They’re two great industries and we’ll be helping them through this patch, and so far I think it’s been going very well." 

Things are so bad that European airlines are flying "ghost planes"—which are flights that are essentially empty, to meet the requirements of the EU's "use-it-or-lose-it" rule. The rule states that airlines must fly 80% of their flights on a slot or they risk losing their spot at major hubs.  

"Passenger demand for air travel has dramatically fallen due to COVID-19 and in some instances we are being forced to fly almost empty planes or lose our valuable slots," Virgin Atlantic CEO Shai Weiss said. 

Climate activists are not pleased with these "ghost flights." "It’s absurd to fly empty planes and cause planet-heating emissions that are completely unnecessary," Doug Parr, chief scientist at Greenpeace U.K., said. "The sensible thing to do would be to suspend the 'use it or lose it' rule so that airlines can keep empty planes on the ground and save many tons of CO2."

With the coronavirus still rapidly spreading, the airline industry likely won't return to normal capacity for a while. Regardless, the damage has already been inflicted on airline companies as they continue to lose money each day the coronavirus saps demand.

Leftover Crumbs

  • What is going on at Robinhood? Following two outages last week and another outage Monday, news broke yesterday that Robinhood was maxing out its credit line amidst the recent market volatility. Robinhood reportedly drew its entire $200 million credit line from Barclays, Citigroup and JPMorgan Chase & Co. Why exactly Robinhood would tap into its credit line—which is typically not a good sign, are unclear. "Our capital position remains strong," Robinhood said in a statement. "We determined it was prudent to draw on our credit line during the week of Feb. 24 in light of market volatility. That capital was returned in full last week."

  • Grocers are fighting stockpiling. Target and Kroger, along with regional grocers such as Wegmans and Publix, are limiting the number of items customers can purchase as they stockpile supplies amidst the coronarivus outbreak. "Due to high demand and to support all guests, we will be limiting the quantities of disinfectant wipes, hand sanitizers and hand & face wipes to 6 per guest," a Target sign read. Kroger's website read "Due to high demand and to support all customers, we will be limiting the number of sanitization, cold and flu-related products to 5 each per order."

  • You can now disinfect your iPhone. After telling customers for years not to use disinfectants on their iPhones and computers, Apple updated its website to let users know they can, in fact, now use wipes to clean their devices. Amidst fears over the coronavirus, Apple said "Using a 70 percent isopropyl alcohol wipe or Clorox Disinfecting Wipes, you may gently wipe the hard, nonporous surfaces of your Apple product, such as the display, keyboard, or other exterior surfaces. Don't use bleach. Avoid getting moisture in any opening, and don't submerge your Apple product in any cleaning agents."

  • Time to pump the stock. With shares of Tesla down 33% from their highs last month, co-founder and CEO Elon Musk has taken it upon himself to try and create enthusiasm by touting new factories for the Cybertruck and Model Y. "Scouting locations for Cybertruck Gigafactory. Will be central USA," Musk tweeted. He didn't stop there, though, saying in a follow-up tweet "Model Y production for east coast too." The Cybertruck is slated to go into production in 2021, while the Model Y began production in January at Tesla's Fremont, CA factory.

  • Led Zeppelin vindicated. A federal appeals court ruled that Led Zeppelin did not steal the riff for its hit "Stairway To Heaven," validating a June 2016 Los Angeles jury decision and ending the years-long copyright case. The suit alleged that Led Zeppelin stole the riff from the song "Taurus" by Spirit, which was written three years before "Stairway To Heaven" was released. "It is undisputed that Spirit and Led Zeppelin crossed paths in the late 1960s and the early 1970s," the ruling read. "But there is no direct evidence that the two bands toured together, or that Led Zeppelin band members heard Spirit perform 'Taurus.'"