Shares go to heck after the mother of all revenue-warnings, plunge 20% in two days, including 7% after hours. Its disclosure confirms Buffett’s decision to dump his airlines in mid-crash.
By Wolf Richter for WOLF STREET.
Delta Airlines came out with the mother of all revenue-warnings when it said in an SEC filing this morning that its revenues in the second quarter, ending June 30, would collapse by 90% compared to the second quarter last year.
In addition to the collapse of demand, it has “experienced significant ticket cancellations” (refunds are counted as negative revenues), and it has waved change fees, which used to be a big profit center, and it is giving out “other refunds,” and they all “have negatively affected our revenues and liquidity, and we expect such negative effects to continue.”
And it cannot predict the effects of this unpredictable future, not even the near-term effects. “The longer the pandemic persists, the more material the ultimate effects are likely to be,” Delta said. “It is likely that there will be future negative effects that we cannot presently predict, including near term effects.”
It added a slew of dismal data points and warnings, along with the hoops it has already jumped through and still needs to jump through to stay in business, including billions of dollars in help from the taxpayer. It was a doom-and-gloom report that not even a sworn doom-and-gloomer would have been able to imagine not too long ago.
Delta’s shares dropped 7.4% during regular hours, and another 7.0% after hours, to $29.40, after having already dropped 7.6% yesterday. It seems, some people knew yesterday what Delta would announce this morning. Over those two days combined, including after hours today, shares have plunged 20.3%.
Delta’s 90%-revenue collapse in Q2 came even as travel restrictions have begun “to ease,” it said.
In response to the collapse in demand, Delta has cut its capacity system-wide by 85%. As demand returns, it plans on rebuilding its flight schedule.
This is an industry-wide problem. According to the TSA, checkpoint screenings at US airports – a measure of how many people are getting on a plane – were still down 86.1% yesterday, compared to the same weekday last year. This has been inching up only in tiny increments. TSA checkpoint screenings over the Memorial Day weekend were down around 87%. During the worst days two months ago, screenings were down 95%:
Only a “modest” demand recovery. And some demand destruction could be “permanent.”
Delta said that “we believe” that there will be a “modest continued demand recovery, particularly with domestic leisure travel beginning to return as states lift shelter-in-place orders.” But it expects international demand to “lag” domestic demand.
Demand issues could drag on as private and public sector employers have switched to work form home and are “otherwise dissuading or restricting air travel,” it said.
Conventions, conferences, big sporting events, concerts, and similar events “have been, and are continuing to be, cancelled, reducing the demand for both business air travel (which drives our most profitable ticket sales) and leisure air travel.”
And some demand destruction could be “permanent.” Delta said it cannot predict whether the pandemic “will result in permanent changes to our customers’ behavior,” such as “a permanent reduction in business travel as a result of increased usage of ‘virtual’ and ‘teleconferencing’ products and more broadly a general reluctance to travel by consumers.”
People may be “dissuaded from flying…”
Delta lists some reasons that may dissuade people from getting on a plane, including:
- Wariness of airports and planes “where they may view the risk of contagion as increased”;
- Dislike of “enhanced COVID-19-related screening measures” at airports;
- “Concern that additional travel restrictions implemented between their departure and return may affect their ability to return to their homes.”
The mad scramble to stanch the cash bleed.
Delta expects to reduce average daily cash outflow to about $40 million per day by June 30, down from about $100 million per day as of March 30. This reduction in cash outflow is a result of two factors:
- Having slashed operating expenses in Q2 by over 50%
- The “recent improvement in net sales,” in part due to the “stabilization in refund requests.”
It is already implementing or is considering other cost cuts, “such as deferral of nonessential maintenance, capital expenditure reductions, voluntary early retirement and opt-out programs, hiring freezes, facility closures, deferral of pension funding, and compensation reductions.”
Alas, yup, all these cuts “could also negatively affect our service to customers, revenues and results of operations.”
But hey, this is survival mode. The goal is to reduce the average daily cash bleed “to zero” by the end of the year, it said. To get there, it expects to cut costs further, and demand will have to pick up.
The mad scramble to raise cash.
Delta has raised “more than $10 billion” since early March, it said. At a burn-rate of $100 million a day, as was the case at the end of March, this would have lasted a little over three months. At the burn-rate of $40 million a day by June 30, the breathing room lengthens.
This “more than $10 billion” in cash came from these sources:
- $3.8 billion from taxpayers via the Payroll Support Program in the CARES Act. The package, when released in full, will be $5.4 billion: $1 billion in loans at an interest rate of 1% for five years; and $4.4 billion in warrants with a five-year term and an exercise price of $24.39 per share.
- $3.5 billion from issuing senior secured notes due 2027.
- $4.4 billion from two loan facilities.
There’s still some “unencumbered collateral” left.
Aircraft, “some engines,” and spare parts that have not yet been pledged as collateral amount to “$6-7 billion of unencumbered collateral” that could be used as collateral for more debt, to raise more cash.
Some of the “unencumbered” aircraft might also be sold and leased back. Since March 31, Delta has already raised $1.2 billion from such sale-leaseback transactions. These leases are a form of debt. Delta said it will classify them as “other noncurrent liabilities.” And they can get expensive. But hey, the only thing that matters at the moment is survival.
And it said that it still has borrowing capacity under its revolving credit facilities. The goal is to pile up as much cash as possible to get through this and worry about the mountain of debt later.
This is the most unpredictable future ever.
“We are unable to predict how long these conditions will persist, what additional measures may be introduced by governments or private parties or what effect any such additional measures may have on air travel and our business,” Delta said.
“Furthermore, not only is the duration of the pandemic and future correlative combative measures at present unknown, the overall situation is extremely fluid, and it is impossible to predict the timing of future material changes in the situation,” it said.
“It therefore is impossible to predict whether any such unknown future developments will occur in the near, medium or long terms, and depending on the duration of the pandemic, such negative developments may occur over the entirety of the event,” it said.
Warren Buffett sold all his airline stocks, including his huge position in Delta in mid-March, when everything appeared to go to heck in a straight line. This was an unusual move for him: Blood was on the tarmac, and that would normally have been a buy-signal. But he dumped his shares.
For him, the entire equation for airlines changed. For him, this wasn’t a short-term blip followed by a steep V-shaped recovery, but a long-term structural issue that would leave the survivors burdened with so much debt and so many uncertainties that the flight path to the new normal, whatever that would be, would stretch over years for the lucky ones. And Delta today confirmed those fears.
Never let a good crisis go to waste. US production of crude steel, #4 in the world, plunged 32% in April. India’s production, normally #2, collapsed 64%. Read... Crude Steel Production: China Blows the Doors off Rest of the World During Pandemic After Already Huge Surge in 2019
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Well, can we get the 2 inches of leg room back.
+1. Although they’ll extract 2 inches of flesh from us. Exactly 2, nothing more, nothing less.
At least DAL is being honest! Kudos to Ed Bastian and his team
Agreed. Me and my co-workers frequently fly coast to coast. Everybody prefers to fly Delta.
Any truth is worth listening to
”Cattle Class Flyers” will soon be able to do what I did, almost always, on the red eye flights from coast to coast many years ago, and have done a couple times in the last decade: spread out across all three seats on your side of the aisle.
Loved those midnight flights.
Seems hard to believe since most flights previous to this latest crisis have been completely full, but it will happen again, sooner or later, when WE the Peedons subsidize all flights on all airlines once again.
Very likely that airlines will also offer ”real” first class service, with sealed cabins once again, likely with only one seat on each side of the aisle so that our rich folks can fly without fearing the rest of us in the cattle quarters.
IMO airlines will be lining up to be subsidized to upgrade cabins with special air filters for first class, along with the fresh cooked meals, etc., especially considering all the puppet pols that will be flying again soon.
It will be “Snowpiercer” in the sky …
I used to book the middle one out of the three seats for the same reason (more likely to take over all of them across)
None of that is going to happen. The covid virus is not going to be a threat forever, so no airline is going to spend money making long term changes to address a short term problem.
VintageVNvet,
I just flew Delta from Manila to Detroit (American airlines from Detroit to Philadelphia) and the thirteen hour flight from Incheon to Detroit had a number of empty three across seats in the middle section of the plane – including next to my aisle seat. That was the least crowded flight I’ve been on in a long time.
I have been seeing mucho articles similar to this one recently. Basically on how young retail investors are finding it so easy to make money daytrading/options in this sector…so far:
Robinhood Users Piled Onto Airline, Cruise Stocks as Market Cratered
Behind Ford, which gained about 125,000 Robinhood shareholders over the past month, American Airlines and Delta Airlines stock cracked the top four most popular stocks during that time. The companies are owned by a combined 170,000 Robinhood users that didn’t own them a month ago.
Source is Cheddar media
You could see it like this: 125,000 people are thinking about buying a Ford. 170,000 people are thinking of flying again. Both types think that their thinking is common among others and stock prices will go up. They could be right … or not.
andy,
The real question is, can I get cheaper flights after the CCP19 saga is over? Or will they be more expensive? It would be nice if international flights were cheaper; Doubly so, if the US Dollar stays strong.
And a discount for wearing a mask!
The flights will be more expensive, 100% guaranteed.
Alot can happen. Right now, I don’t think anyone knows for sure what’s going to happen. If international tourism drops enough, some countries might subsidize flights in an attempt to bring in tourists; This is just one of a thousand possibilities.
Thomas Roberts,
I had to rebook my flight (Manila to Philadelphia) in April. The price had dropped $250 since January.
There are short term deals to be had, but long term, prices will go up. And we’re talking about long term here.
U did not “just fly” delta MNL to DTW.
OMG: the Dow is down 1200 and Mnuchin actually phones CNN and says ‘don’t worry another trillion is coming’.
Oh the subtlety!
Shouldn’t he have to register as a lobbyist for Wall Street.
He wears two hats but which is his day job?
Doubtful. They’ll try to cram even more seats into even tighter spaces.
Since the planes are flying mostly empty, you’ll not get your 2″ back but you are likely to get an entire row of seats to yourself!
If international flights ever get back on track and the planes are empty, I could see some business class passengers eschewing those expensive seats if they knew they could get a row of empty seats in the back.
If the cost of the ticket was coming out of my pocket I’d definitely be packing some decent food in my carry on and bringing a fluffy pillow :)
And with the cash I save I could pay for a big weekend boozing at the Holiday Inn Macau Karaoke Lounge — and waste whatever is left on the black jack tables!
Why can’t Delta Sell Bankruptcy Bonds and StAwks – Like HUrtZ!! Seems like a big growth industry… this is the next big wave..
I stopped flying over a year ago. My last seat had less space and was more uncomfortable than my old fighter cockpit – no kidding!
Great article.
I also think that in a in a world where *every* business is impacted and changes in behavior may be permanent there is no way for the market to know how to price assets today. Price discovery will have to happen later once we approach the new normal. Crazy times!
There might be a rational basis to subsidize the airline industry as it faces medically new & different standards/regulations for Public Interest reasons. Which should in no way be conflated with Jerome’s Everything That Bubbles & Is Rich & Corporate bailouts, because he insists on forcing his “flow” of “credit” onto everything and anything that moves and is Super Rich and non essential.
I think the entire approach to air travel that has developed over the last 25 years will have to change. The era of flying to bachelor parties in Vegas and college football games is over. We will be back to where we were about 1979, with expensive fares and regulated routes to allow the airlines to survive on reduced volume. Living in Bend Oregon, and flying to weekly meetings at your place of work in the Bay Area is over.
Makes sense to me
Worth remembering that we also have an underlying, if slower and less immediate, climate crisis. A massive reduction in air travel until we can electrify air transport is needed for this reason alone.
Really,
perhaps you don’t remember how cold it was once when the rivers, not that long ago, froze here in England or in 1776 (ish) when the ground at Valley Forge was frozen to a depth of 3 feet. Perhaps you want to go back to those times, they were called mini ice-ages.
We could even mention the USA’s warmest decade, the 1930’s but only people who have read Grapes of Wrath remember that.
If this goes on much longer the climate change scientists will get their evidence, and the airlines will need a much smaller carbon footprint before they resume business as usual.
The battery on a Tesla is 540kg. And it doesn’t need energy to lift it off the ground.
Imagine the size of the battery needed to power an A320….
Maybe if they had a second Airbus that was set up as a ‘flying battery’ (basically a batter with wings, engines and a cockpit) following the A320 with a tether transferring power….
Kinda like how they refuel fighter jets in the air….
This could work (do I need to add sarc..?)
That could be true if we decide to shutdown permanently whole pans of tourism and business activities … with associated jobs.
The future will be bitter without the tourism and travel : since the ancient times, travel was considered an important way of character development.
And what become all these jobless people? Stampfood eaters and blogs dwellers?
@Engin-ear
“since ancient times, travel was considered an important way of character development”
That kind of travel can continue. What we are talking about is bored childless middle-class couples no longer flying to Europe four times a year to visit the latest trendy places as a means of frittering their time and money away.
This is what everyone said after 9/11 (which was 19 years ago BTW). Didn’t come true then, not going to come true now. Human beings have an annoying tendency to project current conditions indefinitely into the future.
@Ross
Difference being that 9/11 was a one off event over a day in just a couple of cities. There was no lock down, mass unemployment and closing of most restaurants and hotels and shops in fact the whole economy.
I really don’t see how you can begin to compare the two and then to expect them to have the same or even similar outcomes. Sorry that just makes no sense at all.
The last Great Depression lasted roughly a decade.
If you think travel is tough now, if the stock and bond markets crash, then many folks middle class and higher will not be able to travel, as they carefully watch spending
The problem is, if airlines shrink… manufacturers shrink… hotel operators shrink…. anything tourism directly or indirectly related to tourism shrinks….
We would be looking at literally tens if not hundreds of thousands of businesses being impacted globally — and massive numbers of jobs disappearing…
“TOURISM HAS GENERATED 20% OF TOTAL WORLD EMPLOYMENT SINCE 2013. Tourism is a great contribution to the world economy. The tourism industry not only generates revenues for a country and cultural wealth, but it is also one of the most important economic engines for growth and development.” Tourism Review site.
To put this into perspective there is an organic vegetable shop near us.
Even prior to the lockdown, they changed their opening hours from 4pm instead of 11am.
I asked the owner why they changed and he said that tourism numbers had fallen off substantially (China flights were blocked) — and a big part of his business involves travellers in campervans who stock up while in town.
We are a few weeks out of lockdown and he still has not reopened….
People aren’t flying in planes now which logically means they took their cancelled ticket to Tesla. Please Elon, transport us! Sell Delta buy Tesla because it has unlimited growth potential on Mars where the atmosphere is too thin to fly planes.
Yes… that’s it, buy TSLA, support the Green New Deal…
If you don’t buy TSLA stock, then you don’t care about the environment, you need to hold the stock through thick and thin, buy and hold, baby… even if it goes to zero (unlikely) or $10000000 a share, more possible than you can imagine.
?
See how I conflated the two together? I have no shame. ?
TSLA isn’t a green company. Their product could be seen as green(ish), but the company is not. Cashing in on carbon certs, enabling poluters to keep poluting, isn’t green, it’s bussiness as usual.
Building rockets and going to Mars isn’t green.
Imagine all this intellect being used to solve humanities most urgent problems. That would be something. But building cars and rockets? Come on. Humans are doing that for eons now.
Of course it’s green, it’s a leader in the green space, it shifted the narrative from ICE to electric, it is clean and it is making the industry cleaner with carbon credits. They make companies pay for their pollution.
Or are you against carbon credits… wait wait… are you a spokesperson for big oil… OMG, you are the devil….
?
540kg lithium batteries are definitely not green.
And joy rides into space certainly are not part of a green agenda, nor is Elon’s private jet.
I was never much of a fan of Michael Moore however he has redeemed himself with his most recent documentary Planet of the Humans.
It’s free to view on Youtube for anyone interested in having a few epiphanies.
MCH,
You are on a roll today ??
Wonder if this is a good indication for things to come on Q2 earnings for other sectors like retailers and entertainment industry as well? Quite surprise that Delta stock actually got hammered like this today instead of the “wisdom” lately from WS of Q2 is consider gone anyway and we are forward looking into 2050 to justify the stock price now. Where’s the FOMO retail investors today to scoop up some low of Delta? Especially when papa Jerome just said interest rate ain’t going higher for the next 2 yrs.
Maybe David Portnoy will scoop up some cheap share of Delta tomorrow and brag about it by the weekend.
Forget about travel. The only destinations with a viable future are “ Trumptowns “. They used to call them “ Hoovervilles “. If Capitalism is so great, why are we in this situation ?
There’s a difference between capitalism and Capitolism and Kapitalism. Just as there’s a difference ‘tween Brrrnankruptcy and Powellverty.
Whats the alternative?
The U.S. isnt “true” capitalism. Capitalism allows price discovery.
If Socialism is so great why is Venezuela in their situation?
Silly statements are silly.
Capitalism is the worst type of economic system, except for all the rest.
We can do better than Venezuela.
This MMT … Universal Basic Income is working very well in NZ — people are happy — the PM has high approval ratings.
She’s also suggesting a 4 day work week for the few who are working.
Everyone needs to get a taste to make this system work so I am good with that.
I would even support a 3 day work week, with people working 3 hours in the morning… taking a two hour lunch break … then working 3 more hours in the afternoon. Gotta have 2 months holidays as well.
New mothers and fathers should get 2 years paid matpernity leave…..
What shall we call this new system????
I am thinking ……. Utopian Capitalism
Because this isn’t capitalism.
Stuart, double-check. (…so many of its practitioners seem to forget, or actively resist the ‘…WELL-REGULATED markets…’ admonition in Smith’s ‘Wealth of Nations’).
May we all find a better day.
“How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it. Of this kind is pity or compassion, the emotion we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrows of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous or the humane, though they perhaps may feel it with the most exquisite sensibility. The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it.”
This is from Smith’s, “The Theory of Moral Sentiments”.
Go broke, already! Let the assets have new owners. Remember, how in Monopoly eventually the rest of the players get fed up and one of them dumps the board over so the game can begin anew? Just saying.
And keep an eye on the guy who acts as the banker
I’m seeing big uptick in little people economy. Ikea check out registers lines mile long. Roads with traffic once again. Hate going to store with mask on do more and more online. VIP economy? Well let’s just say thanks to Jerome…what recession? VIP economy all way better off than before.
$40 mill burned per day financed with bonds due 7 years from now, with depreciating access as collateral, all because we just have to maintain the overcapacity… lol
Walking Dead
My wife and I had planed a trip to Scotland in mid-May so I could salmon fish in the Ness,Findhorn and Spey. For Her part we were flying to Helsinki and then to St Petersburgh . River tour to Moscow. Fly to Vienna and trains to Sofia Bulgaria. Fly to Paris for a few days and back to Edinburgh. Then home. We were flying round trip from Atlanta to Edinburgh on Delta DBA Virgin Atlantic round trip in Business Class. After both hip replacements and a knee replacement my wife would not fare well in the cattle section.This was a trip of a life time. The loss to the economies of two continents and the U.K. And Delta is obvious. While significant in cost to us it was just a tiny drop in a big bucket due to C-19. We might not be able to try again which is a personal loss rather bitter. C-19 is a bitch.
Conclusion: don’t wait too long! Dump all your moneyz into Robinhood now, you’ll thank me later!
Oh, I get it now. RobinHood… Robbin the ‘hood, as in robbing the neighborhood. Cute.
imagine what Edinburgh airport is losing just in it’s parking scam, one of the best in the world when it comes to parting you from your money.
And a generally sh*t experience all round in the occasions I couldn’t fly from anywhere else.
Dr.D-sorry for your understandably bitter disappointment. Fortunate to have had a mindset and opportunity to travel (some thanks to the Gov’t.) earlier in life. Years ago we chose to come to terms with being ‘colorful locals’ in a tourist-heavy county when we realized that a prosperous financial future was anything but assured. The result-a good life, not wealthy, in a home and acreage free and clear surrounded by a vibrant rural community.
Best wishes to you in finding, investigating and expanding (I have no doubt) other passions that will also enrich your life.
May we all find a better day.
Delta’s burn rate is as bad as Uber’s burn rate.
Perhaps SoftBank will invest?
Delta isn’t a risky insane enough investment for Softbank. The name Softbank means something. When you think Softbank, the first thing that should pop into your mind is WTF. WTF today, WTF tomorrow, WTF for 300 years.
The aviation industry is done. When they start talking about selling spares or using them for loan collateral to keep going……. Senior aircrew will pull the pin and retire. Newbies will not be able to afford the training. Many mid career aircrew will no doubt find something else for a living, provided they have other skills.
I live on the great circle route from SeaTac/Vancouver to all parts Japan, Korea, etc. 24 hours a day it would be possible look towards the mountains and see planes on climb out heading west. Now? I hear one every few days. I used to also see a steady stream of float planes heading up the coast to fishing lodges and native villages. I have seen just two float aircraft since Covid hit in March, and my ear is tuned in because it was my trade for almost 20 years. Two planes in 3.5 months when this time of year it would be several every hour. A smart local feeder airline simply shut down in March, idling their entire fleet. They were the smart ones; Buffet smart.
In shutdown mode people move on, stuff goes missing, and iron ages. There will still be flying, but gone are the days of destination weddings and sunny all inclusives for the hoi polloi.
I’ve seen 80% of coastal pulp and sawmills shut down in the last 20 years. There isn’t a fish cannery operating in BC, when Prince Rupert alone had seven. In fact, there were seasonal canneries spread up and down the entire coast employing thousands. The northern diamond mines are now closed as of this week, and the prospects of any new mines for any mineral in BC/Yukon are nil. And the great saviour for all, tourism, is bad for your health, and outlawed.
Nah, there will be no return to wishful ways any time soon. With a resurgence of Covid 19 starting up, there won’t be consumer hope until a vaccine is approved. Jet travel for the masses? Don’t hold your breath.
There will be a reset, but with all the debt increases to juggle the balls will real growth be possible? New Zealand is virus free, Australia is close. My province of BC is almost virus free and there are no active cases on Vancouver Island, population just under 1 million. Do you think any virus free venue wants tourists? The lodge owners might, but no one else does. Last poll showed 87% of Canadians want the border kept closed.
Paulo, you are one of the consistently excellent commenters on this site. Keep up the good work man.
Paulo,
I agree with everything you said, but you’re addressing only one side of the equation (i.e., the real economy). If a poor economy and resulting deflation cause everything to have halve in terms of real value, the Feds can increase the money supply by 50% and show no loss on paper. This causes wealth transfers from workers to asset owners, but the central banks around the world have made that a goal, at least until there is a convincing revolution of sorts.
I don’t see anything that will change this in the near term. The little revolts that rise up (Me Too, Black Lives Matter, anti-Trump, etc.) are not focused on root causes and these movements can be easily resolved with lip service or “new” candidates that talk tough but soon get absorbed into the status quo.
think of all those privatized airports running a racket, got to be completely stuffed.
I’ve never understood this V-Shaped recovery thing. After three months of full or partial shutdown (with more to come), companies have lost revenues, incurred debts and paid out fixed costs they cannot recover on and drawn down on their working capital. In other words, they are poorer, less likely to survive let alone invest in the future. There was and is no way we can go back to “the way it was”, the money is gone, spent, evaporated, but the debt/deficit of the shutdown is still there, and getting worse. Much business that was is non-existent. As to Airlines, what airlines?, planes that don’t fly, with no crews or passengers, are not airlines, they are empty pieces of metal sitting on pavement rusting. On paper they are Airlines, on the ground they are collections of surplus planes, of falling value.
Flying was already a pretty unpleasant experience before the virus hit. I’m personally not particularly worried about the virus, but I don’t want to join even longer queues in airports and be treated even more like a piece of s… by people wearing hazchem suits. Add to that the risks of being refused boarding because of a slight temperature, refused entry on arrival, or getting mixed up with an airline failure or another lockdown, I won’t be going anywhere until something like “normal” returns, if that ever happens. And in the likely absence of a vaccine, it may never happen, sadly.
Not a big believer in technical stock market analysis, because so much of it reads like trying to prophesy the future based on the shapes of squiggly line charts, like reading tea leaves or burnt animal bones ….. but
I’m thinking this ain’t a V-shaped recovery at all, but merely what those stock technical analysts would call a “double top reversal” signal.
Certain politicians have been pushing hard to re-open the economy, mainly to get themselves re-elected. Faux News has also been pushing hard on this angle. The HHS Secretary even prematurely Trumpeted the reopenings as “successful and not causing any renewed outbreak of COVID”, ignoring, as usual, the science, which would have told him that it would take at least 2-3 weeks for the statistical increases in COVID to show up.
Ta-Da! Here we are 2-3 weeks later, and indeed COVID hospitalizations are climbing steadily, especially in the Republican controlled states most eager to re-open their economies. Arizona, Georgia, Texas, Florida….
Predicting the future based on science and what we have learned about COVID would tell you a few other things:
1. A truly effective vaccine (i.e. 90% or greater) might not be possible. 60-70% is probably the best that we can hope for. That’s because we already know that not everybody who gets the real COVID infection develop a terrific enough immune antibody response that is enough to fight off another COVID infection.
2. Some people, YOUNG people, are now turning up with chronic COVID infections
3. If you think getting people to wear masks is hard, getting Americans VACCINATED will be even harder. Probably as many as 30-40% of Americans will refuse to ever get vaccinated. I will probably wait on getting a vaccine until at least the first 6 months to one year’s experience to see how effective they are and what side effects they have
4. It’s more likely that better drugs to treat COVID will come along. Remdesivir is not the answer. It appears to be at best merely the weakly effective Tamiflu of COVID infections
All of this means I’m not planning to get on an airplane or go inside a restaurant or movie theater for at least another 2 years most likely. You can guess how that will change the economy when that thinking is multiplied by tens of millions of Americans
Yep, science can predict things better than tea leaves or stock technical analysis
That was supposed to be a reply to Augusto
Unsubscribe you are a pessimist
No one at delta ever said any of this
‘Aircraft, “some engines,” and spare parts that have not yet been pledged as collateral amount to “$6-7 billion of unencumbered collateral” that could be used as collateral for more debt, to raise more cash.’
Yeah, aircraft and spare parts will be a hot commodity in a depression.
As any spanner can see…
Wolf said:
“This “more than $10 billion” in cash came from these sources:
$3.8 billion from taxpayers via the Payroll Support Program in the CARES Act. The package, when released in full, will be $5.4 billion: $1 billion in loans at an interest rate of 1% for five years; and $4.4 billion in warrants with a five-year term and an exercise price of $24.39 per share.”
—————————————————————–
I take it it’s 5.4 billion, not 3.8 billion. Is Delta receiving 4,4 billion in cash, with the Treasury receiving warrants for 4,4 Billion, making them in effect a purchaser of Delta stock, in waiting? If the stock goes below $24.39, does the taxpayer lose?
Or, could the Treasury exercize the warrant tomorrow and “book” an immediate $7.25 per share gain (current stock price = $31.64)?
cb,
1. What this says is that Delta already received $3.8 billion of the $5.4 billion package. It will receive the remaining $1.6 billion later. The total $5.4 billion package is composed of $1 billion in loans and $4.4 billion in warrants.
2. Yes, the Treasury bought warrants from Delta for $4.4 billion. Warrants are similar to call options in that they give the Treasury the right to buy shares, but not the obligation. When the deal was negotiated, Delta’s shares were in the low $20-range, near the negotiated exercise price. And yes, in theory, they’re now in the money and the taxpayer comes out ahead for the moment.
And yes, if the shares fall below the exercise price now, and within five years don’t rise above the exercise price, those warrants expire worthless. In a bankruptcy, the warrants are likely to become worthless as well.
If the taxpayer is shanghaied to bail out a corporation, it should never be with grants (gift) but always with interest-bearing debt or equity. Warrants are a high-risk investment. But at least for taxpayers there is an upside if the bailout works. And existing shareholders pay a price in that they get diluted.
Question Wolf – If the Treasury *bought* warrants, shouldn’t they technically be considered options? (Yes, I noticed you compared them to call options).
Warrants are generally “free” and attached as a sweetener; options have a cost.
I only compared the no-obligation-to-buy part to options. Warrants are issued (sold) by the company to raise funds. Options are sold by third parties and they don’t raise a dime for the company.
Thanks and appreciate the reply.
Thank you.
US airlines have two problems.
The first is their executives panicked and slashed far too much capacity, either sending it into long-term storage or scrapping it altogether. American Airlines is pulling 200 aircraft out of long-term storage, United a further 140 and Delta an “undisclosed” number: as putting these aircraft back in service takes time this capacity will only start to come back in line in 7-10 days and should be fully operative by the end of July.
This contrasts with European airlines like Air France, Lufthansa and Ryanair which kept the bulk of their capacity on short-term storage and only put the higher hour airframes in long-term storage since they would be the last to be put back in service anyway. This gave the airlines flexibility to either put that capacity back in service (like they have already started doing) or sending it into long-term storage in cheap airports like Ciudad Real and Teruel at a later date. By contrast US airline executives immediately went into full-panic mode.
The second is the media. Our media here are at their wits ends to keep people scared, but they have nothing on American media. One has to wonder how present-day US would be able to win a real war (not bombing mud huts from 40,000ft in the air) given how obsessed with keeping people scared US media are. These media have managed not just to scare people, but to contribute to a climate of uncertainty by giving voice to every charlatan wearing a lab coat (as one of my professors used to say “Every profession has its fair share of madmen, charlatans, criminals and idiots, including university professors”) which in turn pushes politicians (a category far more dangerous than any virus) into feeling compelled to add to the pile with near-continuous threats.
While it’s easy to blame US airline executives for overreacting and US air travelers for being scared out of their minds in this climate it’s very hard to keep one’s wits about him.
To change tone a little European regulators have decided to give a lot of leeway to national regulators for internal flights and to airlines for trans-national flights. For example ENAC, the internal Italian regulator, scrapped most Covid-19-related measures on Monday and left the rest to individual airlines to decide.
While air traffic has finally started to pick up, most passengers are waiting for somewhere to go. Even after quarantines are dropped there’s still the issue of hotels to say one: too many countries are flip-flopping or even leaving stuff in a grey area for purely political reasons.
To give an example Austria’s borders are technically closed to all but freight traffic and “vital” workers, but practically there’s nobody checking. This weekend a man wanted for multiple murders in Austria crossed the border into Italy, drove about 60 miles and then shot himself. Nobody stopped him at the border or near it despite the license plate of his car being in the Interpol database. It has already become a political case: Italian authorities have washed their hands of the matter since borders with Schengen Area countries have reopened on June 3 but Austrian authorities have to explain their own citizens why a wanted murderer could cross the border at will while they are still prevented from going on vacation Italy or Spain.
“how obsessed with keeping people scared US media are”
In America, the amygdala is flogged mercilessly, it’s the only way corps know how to sell or get eyes, ears and clicks any more.
MC01,
“The first is their executives panicked and slashed far too much capacity…”
I DO urge you to look at the chart of TSA checkpoint screenings. These are the number of people getting on a plane each day in the US. This is still down 87%. Delta predicted its revenues for Q2 will be down by 90%. Yes, traffic is ticking up but very slowly. Delta is adding flights to its schedule as needed.
European airlines are just a little slower. Lufthansa today announced that it will cut 22,000 full-time employees. It just takes them a while.
Wolf, I don’t think you understand my point.
My point is US airlines have slashed too much capacity long-term. JetBlue has sent their whole Embraer 190 fleet (60 hulls) into early retirement. The Airbus A220 (assembled in Mobile, AL) which are slated to replace them on a 1-on-1 basis have been delayed and that capacity will only be back in Q4 2025-Q1 2026. This gives JetBlue no flexibility at all, and for half a decade to come. If demand rebounds quickly JetBlue will be forced into expensive leases to make it up. Instead JetBlue could have opted for more flexible solutions like, say, put 70% of their E190 in long term storage and the remaining 30% (all lower-hour hulls) on short term storage and see how the situation evolves. Once dust starts to settle it’s much easier to take rational decisions.
Lufthansa is one of my polemical idols and I may include something about it in the next piece that languishes half-finished in my hard disk. Suffice to say that while Lufthansa has some great divisions which make them a ton of money (the 747-8 fleet to say one), on the general it suffer from a bad case of elephantiasis which is chiefly caused by politics.
Lufthansa has been cajoled/forced/bribed/whatever into buying clinically dead airlines for two decades now for purely political reasons. An example is Eurowings: originally formed from two effectively bankrupt German airlines (NFD and RFG), it was fully acquired by Lufthansa in 2008 to avoid having to liquidate it. Eurowings has been restructured as a low-cost subsidiary for Lufthansa but has lost money every single year since, especially since Ryanair moved into the German market. This is the perfect occasion to prune a lot of dead wood, something that Carsten Thorsten wanted to do for years now.
It remains to be seen how many cuts governments (Lufthansa also owns airlines, most of them quite bloated, in Austria, Belgium and Switzerland) will allow: Alitalia is not alone in the swamp. ;-)
Wolf,
Might the capacity constraints imposed by the airlines themself be acting as an upper bound for TSA screening numbers. As in if all airlines have cut capacity by 85% the most we might expect to see through TSA screening would be 15% at this point.
The entire correlation that TSA screening numbers represent the upper bound of demand might be off.
Three weeks from tomorrow the Formula 1 season kicks off in Austria – with no fans in attendance. Last year’s race had 203,000 fans over the weekend.
Many of these were Dutch, and they’d be back again to watch Max Verstappen, but they won’t be flying in from Schiphol this time around.
F1 returns. hooray for that. No orange smoke in the stands this time.
MC01,
IMO, the US airline execs have it correct, especially with the very clear surges going on right now in many places in USA that HAD been locked down, ”socially isolating” etc., and now coming rapidly to the point that HAD been very likely if the lock down had not happened at all.
Some of these places are indeed looking to be overwhelmed as far as hospital bed availability, the main ”talking point,” at least for the MSM, at the beginning of this virus event, for the rationale for the lock downs.
In spite of these surges, we are not likely to see another round of lock downs due to the approaching elections, no matter how serious the growth of the number of new cases becomes before November; after that election, anything can and may happen, including a total national ”stay at home” order, enforced as you have mentioned re Italy, if for no other reason than as a rationale for the troops in the streets in USA, as you reported was happening there.
While I do believe air travel will once again approach the volume of passengers seen in the ”teens,” I also believe there will be significant and serious structural differences both in the planes themselves, and all the social aspects of flying, including reverting to the ”class distinctions” that were common several decades ago. These will include ”first class” concierge services from home to destination, (pick up by limo, no line check in, entirely separate compartments inside planes,) etc., etc.
As far as the hysteria, I couldn’t agree with you more: ”It’s the clicks baby” may very well be the MSM mantra, eh?
It is 5 months to November. I would expect a lockdown. Blame it on the demonstrations while in reality it was states that left lockdown to soon.
Here is one thing I don’t understand. If new cases here are both scarce (and apparently all traced back to “50 between hospitals and nursing homes”) and mild, why does the US behaves in different fashion? Perhaps the virus is “bigger and stronger”?
The lockdown here ended on May 4, and on May 18 bars and restaurants re-opened, followed by panicked reactions by the media about “young patrons dropping like flies” when pictures of packed bars surfaced. Nothing happened: the average Covid-19 patient in Italy is 65 but, fortunately, now he has a very high chance to make a full and speedy recovery. Again, what’s so different in the US?
Yesterday evening the Italian government announced the dates for yet another round of re-opening: all travel restrictions will be dropped on July 1 (last week all restrictions were dropped for the Schengen Area, Albania, Great Britain and a few other selected Balkan countries). I very much doubt they would drop restrictions, let alone allow Alitalia to restart flights to New York, if they knew there’s some “super strain” of deadly virus in the US.
I know this is not a welcome opinion, but this stuff has long stopped being about a virus and it’s long been about the lowest kind of politics. It’s not hard to see what US State governors aim at.
This is not a hoax.
The virus is very real, but it’s still no excuse for the absolutely ridiculous overreaction by authorities around the world.
Here the lockdown started on February 24 and on March 4 we were even forbidden to get out of the house for a jog. The virus laughed at the helicopters used to harass dog walkers and at the heavily armed soldiers in the streets, gave a two finger salute to the government and marched straight into nursing homes and protected communities, where it’s still killing people.
In short all those sacrifices have been in vain, and the lockdown zealots know it.
There are now literally dozens of lawsuits here in Italy about this “failure to protect” and the government is sweating profusely as coalition members are starting to plot whom to offer to the nation as a scapegoat while smaller fries (such as politically appointed hospital directors who failed to implement epidemics protocols after being warned) are quietly scrambling for the exits. It’s a good thing on July 1 all restrictions to international travel will be lifted so they can escape to some place where extradiction is nothing more than a fancy word.
Regardless of anything, somebody has to pay this time around, if not for ruining the economy and dividing society at very least for the complete and utter failure to protect lives.
LOL….Everyone is worried about their money, and which way the stock market is going, and the price of TSLA, and their abbreviated travel plans, and BLM and protests and republicans and democrats, while the government is actively pressing its knee on all our necks. All of your worries are distractions from the main issue: our descent into tyranny.
Go count your money. Cry that you don’t have enough of this or that.
When you are taxed out of assets, or your money won’t purchase much,
and your pension is near worthless, maybe you will think you should have raised your voice.
Hypocrite.
‘It seems, some people knew yesterday what Delta would announce this morning’
It often does. I used to believe such was illegal…
The pandemic supercharged video/chat app adoption and remote working arrangements; ie. Skype/Microsoft Meetings/Zoom/Facetime/Webex; and others.
We are in a new era.
How is the Fed helping this? Please excuse me or excoriate me if this is too off topic or has been covered thoroughly already:
The Looming Bank Collapse, Frank Partnoy, The Atlantic
“But in December, the Financial Stability Board estimated that, for the 30 “global systemically important banks,” the average exposure to leveraged loans and CLOs was roughly 60 percent of capital on hand. Citigroup reported $20 billion worth of CLOs as of March 31; JPMorgan Chase reported $35 billion (along with an unrealized loss on CLOs of $2 billion). A couple of midsize banks—Banc of California, Stifel Financial—have CLOs totaling more than 100 percent of their capital. If the leveraged-loan market imploded, their liabilities could quickly become greater than their assets.”
…
“So while the banks restrict their CLO investments mostly to AAA‑rated layers, what they really own is exposure to tens of billions of dollars of high-risk debt. In those highly rated CLOs, you won’t find a single loan rated AAA, AA, or even A.
How can the credit-rating agencies get away with this? The answer is “default correlation,” a measure of the likelihood of loans defaulting at the same time. The main reason CLOs have been so safe is the same reason CDOs seemed safe before 2008. Back then, the underlying loans were risky too, and everyone knew that some of them would default. But it seemed unlikely that many of them would default at the same time. The loans were spread across the entire country and among many lenders. Real-estate markets were thought to be local, not national, and the factors that typically lead people to default on their home loans—job loss, divorce, poor health—don’t all move in the same direction at the same time. Then housing prices fell 30 percent across the board and defaults skyrocketed.”
Yes it was such a surprise, wasn’t it. Positively guilty of killing kittens and supporting Stalin if you pointed out that a widespread daft system might behave in a widely spread and daft way in the event if a significant downturn.
But it’s a different set of letters now, see, so this time it’ll be different…..
But Powell was congratulating Moochin on keeping the exposure “outside the banks.” This is clearly a fantasy, how can Powell be so dumb???
Overall this is a good thing. Since the invention of the telegraph there has been NO REASON for people to travel long distances for meetings and conferences. Especially in the era of video phones. Travel is a total waste of resources.
well, it is hard to give someone a hug [if that will ever be permissible again] over the phone. It will be good to examine our reasons for moving around, without a corp’s existence depending on it.
beg to differ poli,
In early 1977, in order to see my parents and siblings, i hitch hiked approx 10,000 miles from OR to SF to ”upstate NY” to Maine to FL and back to OR. saw mom for the last time in NE…
Now, to see siblings and just some of our kids and grands, it would be more like 20K miles,,, and so it goes with modern life, kin of all ages going where they want to live and ”do their own thing” unlike say 100 years ago when it was only the very rich who could and did such travel…
Would you say, as Portia suggests, no more hugs and just ”hanging out” in person for all of us going forward?
I don’t think so, and I can’t imagine most people would think so either. This event will certainly cause changes, but, eventually air travel will become common once again.
I haven’t seen a quantitative study of contagion during air travel… with masks and other measures.
This might not be as bad as everybody thinks. Bad enough, though.
My MD neighbor on one of the state govt. virus task forces (moving hardware and PPE to most needed places) says the thinking is 9-12 months of similar infection rates, responses needed, etc.
I almost always flew ‘cattle class’ because flying is simply a means to an end — just get me to where I need to go, cheap as possible. Unlikely to be flying again anytime soon. But hey, I have an older Lincoln Continental– I can easily drive to where I need to go, and ‘first class’ to boot!
Anytime someone uses “plunge” to describe this current market I take it with a grain of salt. DAL is still up over 60 percent from its recent low and traded under $10 back in 2012. Dow is still up 400 percent from 2009, Nasdaq up 500 percent, debt levels have increased greatly since then. We are a long ways off from any sort of meaningful plunge and the PPT aims to keep it that way.
Duane,
If a stock “dips” 26% in two days, it’s a “plunge” in my book. You seem to own DAL. If yes, sorry you took a beating. But DAL still plunged.
Flying is back to a rich person’s luxury. Either you can afford a private jet or you travel via Ford on bumpy highways and shaky bridges.
IMO, the airline’s travail is symptomatic of a more general financial future for all of us: The dollar will lose its preeminence and all of us will suffer a reduced standard of living. I speculate which services are likely to shrink the most? Which will we more likely do without, or curtail?
Air travel seems to me to be one of the most expendable.
Blakeslee, nice to see you popping up on this site. I used to enjoy your comments on the Telegraph (when they still had a comments section).
Agree that air travel will become what it once was, for the well-heeled.
On a related topic – my neighbour, who sells cruise holidays, reports that they are taking a flood of bookings – for the end of 2021. By that time, people are hoping there will be an effective vaccine. The problem for firms like hers is that they don’t get paid their commission until a month before each cruise, so have cash flow difficulties in the short term.
Of course, the cruise customers here on Vancouver Island will have to hope there are affordable and available flights to the requisite port. I daresay the cruise lines will offer something toward the air ticket?
We haven’t had a terror bombing in a long while? If this continues TSA will layoff workers as well. The correlation with drops in terrorist activity should set up a few cost efficiency studies. Like what is the real cost of allowing people to fly all over the world spreading violence and disease?
The airlines are just a lagging indicator of the economy. Airline travel has frequently been used for profitable businesses and for luxury vacations for the well paid. The decline in prices enabled more and more persons to use them. As the economy goes down, the airlines will go down more: a lot of their business is unnecessary, overpriced, and essentially, a luxury, like diamonds.
However, this pandemic continues and reportedly just caused what would be called a market crash if it had happened in most of the last 100 years. I am surprised that these investors were surprised: the facts about this virus have been available in scientific and other publications for months. Too often, denial and hope have taken the place of realistic expectations: too many US and other companies are still grossly overvalued and will never live up to their investors’ expectations revealed in their PE ratios.
Reality is coming back and will soon bite them.
Did everyone notice yesterday that Powell said unemployment was his focus? He isn’t concerned about asset bubbles, at least not really, and he intends to keep interest rates low for 18 months.
That’s a pretty solid Powell Put, isn’t it?
I interpret Powell’s comments to mean he’s not concerned about bubbles, even when they pop, as long as unemployment isn’t impacted. That said, I don’t listen to Powell any more. His words are extremely deceptive or at least inaccurate, based on his track record. The problem is he’s never had a plan that makes sense in the medium or long terms.
Hey, there was hawkish gradualism. That worked out swell don’t you think?
Everything will be alright if we just make that next trillion stimulus fund stock buy backs. If Powell also wants more employment, we can stick in a rule that each share bought back must be carted manually (not electronically) by hand, by an unemployed person, one share at a time, to the corporate headquarters from the holder.
That will put a lot of folks to “work.” But we need to make them dress in traditional garb…I’m think old Roman dress, aka gladiators, only because the costumes of the Old South might provoke riots just now.
A high proportion of fixed costs in transport mean that even a small drop in passengers will make providing the service considerably more expensive. It costs much the same to run a plane/train/bus for 1 passenger as for 100. But this applies in many other industries from software development to manufacturing. Scale is vital. I guess markets will figure this out eventually.
The panic is over and now the disappointment is setting in.
Wolf, is it time to short the airlines?
Anmol,
With hindsight, it was time to short Delta and the airlines three days ago, and maybe cover at 3:30 PM today. With hindsight, I can give you an update a week from now ?
Stocks are crashing to levels not seen in 48 hours. The Fed better do something.
Levels not seen since March. We’re about to hit the lower circuit breaker (-7%) if things don’t get better within the next hour.
I meant ‘rate’ not levels. :) The rate is problematic though because it can set off the next leg of the crash….or the retail buyers will come in and push it back up!
Oh good old Papa Jerome….stuck his foot in his mouth again yesterday didn’t he? He shouldn’t known better when feeding the WS junkies…giving them plain old cracks is not good enough anymore. He should’ve came out and said negative interest rate by next month and GDP is going to be on a tear soon. Afterall, why try to be truthful now his goal is nothing more than pumping up a never ending bubble.
Don’t worry though, market figured him out perfectly. Temper tandrum today…gotta cry a little to make him coming back for more. Keep going down, another 3T is on the way…that balance sheet sure does look better with 10T than 7T..go big or go home.
And some demand destruction could be “permanent.”
No kidding? They left out the part about how they have actually treated (aka, stiffed) the customers and how those customers will never return to Delta because of Delta’s own cavalier attitude towards its customers.
Re the Stock Markets I think this is what happens when delusion smacks headlong into reality. Either that or they decided it was time again to fleece the new investors who don’t quite get the game and lets face never really will.
I’m thinking…. given the massive numbers of aircraft that are never likely to fly again (and that are likely to be sold off for parts?)… that I would not be accepting engines and spare parts as collateral. Or at best, half a penny on the dollar….
But that is because I have ZERO confidence that we will ever return to anything that resembles the pre-Covid normal.
”Aircraft, “some engines,” and spare parts that have not yet been pledged as collateral amount to “$6-7 billion of unencumbered collateral” that could be used as collateral for more debt, to raise more cash.’
Meanwhile how many people in cities/countries that are major tourist destinations are reading this and collectively groaning in dismay….
We dropped our cottage back onto Airbnb 4 days ago at 1/3 off the usual rate to test the waters — zero bookings so far. And ski season starts in two weeks…..
Me thinks that the operators counting on skiers to boost their numbers are going to be profoundly disappointed.
Hope is dying a thousand deaths.
CV19 Surcharge….That is the new line item that will start showing up on any service that you purchase or contract for. It will be especially funny when the banksters, insurance agents and RE agents start charging a fee “due to covid” ??
flightradar24.com shows air traffic is about as crowded as always in US skies??
Are they all empty, or are they all freighters?
They also put a big question mark over the spread of the Chinavirus in the USA.
“flightradar24.com shows air traffic is about as crowded as always in US skies??”
There is something wrong here. Flight traffic in the US is clearly way, way below normal. I can see it with my own eyes here in San Francisco. Hardly any planes at all.
3.23 PM Australian Eastern, 10.23PM US Western,
the US is heading for bed, and Europe is just waking up. There are about 4000 planes in the air around the world as we speak.
Even as we speak the US has a hell of a lot of planes in US domestic skies.
The usual world wide figure at any one moment is about 10 to 12 thousand planes, pre Chinavirus that is.
Apologies to Emporer Xi!