Once Again U.S. Airlines’ Stocks Have Turned Into A Death Trap For Investors Running With The Herd

Have Americans – and more specifically American investors (and even more specifically still, Americans willing to take on risky investments in U.S. airlines) – lost their ability to think and evaluate situations critically and independently?

We’ve heard, read and watched a lot about herds lately. There’s been talk of herd immunity in relation to COVID-19, and of the herds who support or oppose quarantines and lockdowns. There are the standard Democratic and Republic political herds, and the herds who either hate or love anything President Donald Trump says or does. There’s much been said about the herds who support Black Lives Matter and the many organized protests around the nation over the past three weeks, and more said about the herds who strongly oppose riotous violence even if the event that triggered much of it was horrifyingly evil.

And in the investment world there have been multiple stampedes by herds of investors selling, buying, selling again, and now buying, among other things, airline stocks.

The one thing missing from among all that various herd activity is the lack of independent critical thinking and analysis by most involved. Indeed, that’s sort of the definition of herd activity, in any realm of life. And maybe that’s okay in the world of politics and in the area of societal, economic and racial interactions. Those are areas inherently prone to emotion-driven behavior that only over considerable time can be moderated by careful, critical analysis of what really is or isn’t achievable and what is wise or unwise.

But investors are supposed to be cold, calculating types. Not emotional members of a herd easily driven en masse to its own destruction. That’s especially true for those who invest in airlines. That, historically, has been one of the most risky and complex sectors of the economy into which people with money they’re willing to put to work can venture. Just ask Warren Buffett, who twice – 30 years apart – has lost a ton of money betting on airlines.  

There’s a reason why one of oldest lines – retold in various forms and credited to various “sages” – about investing in airlines remains both acerbically humorous and true today: The best way to become a millionaire in the airlines business is to start as a billionaire and buy an airline.

And as if that line isn’t enough to drive home the point that airlines always have been risky investments, another oft-quoted line – again delivered in different forms and credited to various wise guys – goes all the way back to Dec. 17, 1903 and the Wright Brothers’ first flight at Kitty Hawk, N.C.: – Wilbur would have done us all a favor if upon watching his brother get their Wright Flyer into the air for the very first time he would have shot Wilbur down.

So no one should be surprised that on June 11 owners of American Airlines’ stock lost 15 percent of their money in one day, or a gagging 30 percent of their money between June 8 and June 11; and Delta Airlines investors lost 26.5 percent of what they had invested in that carrier over those same four trading days; or that United Airlines’ shareholders suffered a 32.2 percent loss in the same period. Why even Southwest Airlines, the golden child of airline investors’ dreams, saw 19 percent of their holdings in the industry’s new leader wiped out over those same four days.

Yet surprised they were. They were maybe hundreds of such investors; maybe even tens of thousands of them. Who knows how many people – and, pathetically, professionally-managed stock funds, hedge funds, and other supposedly pros – actually bought into specious run-up in airline stock prices over the three weeks measured from their bottoming out on May 15 through June 5. But every single one of them should feel like mooing a little today. That’s because they have earned their way into membership of the herd.

Indeed, the herd mentality was pervasive in regards to investing in airlines that as carriers’ stock prices rose more than 40 percent over that three-week period that J.P. Morgan airlines analyst Jamie Baker, who for years famously included “Warning: Investing in airline shares can be hazardous to your wealth” in every one of his reports to investors, felt compelled to issue a report early in the monring on June 8 in which he gently tried to talk over-exuberant buyers of airline shares in off the ledge. Baker warned those freshly arrived on the airlines bandwagon that there remained then – and still remain – several key questions about how long it will take carriers to recover from the near-total collapse of travel demand in response to the COVID-19 pandemic:

·        How significant of an impact will all of this have on the future of business air travel demand?

·        Might an extended, sharp reduction in repeat business travel demand result in airlines needing to adopt new, more dynamic pricing models (i.e. will they have to greatly raise their prices for business travel, thereby reducing business travel demand even more and further separating the business and leisure travel fare price points)?

·        Will international business travelers – the industry’s biggest-spending customers – and their corporations grow more and more comfortable with travel alternatives – like Zoom – the longer the current weak level of travel demand and limited travel opportunity exists, thereby creating a more-or-less permanent reduction in demand for such high revenue kind of flying?

·        If we do see a significant and semi-permanent downward shift in business travel demand, would that cause the big-name, full-service airlines to implement big changes in their business models because they no longer can rely on the sale of lots of first class, business class or even full-fare coach class tickets as their primary sources of revenue?

It’s probably not fare to blame Baker’s commentary on June 8 entirely for the dramatic drop in airline share prices over the next four days, or to credit him entirely for causing to those who’d been throwing hundreds of millions of dollars into airline shares over the previous three weeks to re-think their approach. Other analysts and Wall Street gurus also were questioning, albeit less openly, the wisdom of plowing big money back into airline stocks. But in any case, the herd turned, beginning on the 8^th, and once again.

Their near-stampede out of airline shares accelerated on Thursday, June 11 after Delta disclosed in a filing that it is trying to renegotiate the terms on several billion in debt payments, hoping to gain more time before the next payments are due near year’s end. If Delta, which generally considered to be in a much better financial position than either American or United because it has more liquidity and much less debt than those two, is feeling the debt collar around it’s neck getting a little tight what does that mean about the other two?

Furthermore, with Southwest, which has by far the least amount of debt of the nation’s big airlines and still a 25 percent – 30 percent cost advantage over them now gearing up to be back to full strength with 800 planes in the air by sometime in the fourth quarter, the so-called Big Three conventional carriers are now being squeezed. Do they too start adding back lots of grounded planes to their operation – planes they know they won’t be able to profitably fill for perhaps a year or more – or risk losing big chunks of domestic market share more or less permanently by not matching the financially healthier Southwest’s relatively quick rebuild?

So, with all those questions – and lots more we won’t get into here – still far from being answered, right now is not exactly a good time to be deeply invested in airline shares. True, for those with a high tolerance for risk, there’s a potentially huge pot of gold at the end of one, or maybe two or three, airline investment rainbows. But the risk, as Baker’s long-running warning to his clients makes very clear, is enormous.

It is neither the purpose nor the place of this commentary to offer stock trading advice. But after sitting in a front row seat watching the melodrama of the U.S. airline industry for more than 36 years now, it’s easy to spot the formation herds of airline investors. Some individuals within those herds do, in fact, get lucky – or win by rightly forecasting turns in what remains and likely always will remain a cyclical industry. But most members of such herds eventually get trampled upon.

Airline stocks continued their tailspin Thursday after Delta Air Lines warned in a filing that it is seeking to renegotiate debt and a credit-ratings firm warned of “negative implications” on some of Delta’s debt.

S&P Global assigned a BB rating—below investment grade—to Delta’s proposed issuance of $1 billion in senior unsecured notes and placed the debt on a “CreditWatch with negative implications.” S&P said that investors could expect to recoup 35% to 50% of their principal in the event of a default.

Ratings agency Fitch assigned a similar BB+ rating to the unsecured notes, which Delta is expected to use to bolster liquidity. “Given Delta’s rising debt balance, Fitch views the company’s headroom within the ‘BB+’ rating as diminished, and future ratings downgrades are possible should recovery prove slower than Fitch’s expectations,” Fitch said in a release on Thursday.