THE TIME FOR INVESTING IN AIRLINES IS NOW – IF YOU CAN HANDLE THE TURBULENCE.

Globally, air travel is grinding to a halt, revenue is plunging toward zero and future demand is likely to be severely depressed for the next 12-18 months. No surprises then as Airline stocks have been decimated over the past month. The outbreak is showing no signs of slowing and shareholders remain anxious about the period of deep losses and rapid cash burn that is lurking ahead. But for the bold and the brave this could be a once in a lifetime opportunity.

Airlines are one of the most impacted sectors in the COVID crisis just like Banks and Housing were in 2008/2009. With negative information arriving almost daily, it's impossible to quantify accurately exactly how much money Airlines will lose due to the pandemic. Understandably, until one can get a better handle on the future demand and revenue, most investors might prefer to sit on the side-lines. Nothing in this article should be considered an investment recommendation and truth be told it is not often that investors make money in airlines, however it certainly has been done in the past and I suspect it can be done again!

FORTUNE FAVOURS THE BRAVE

If you are inspired by the legendary investor Warren Buffet who invests on the long-term value of a company, then today is the perfect time to invest in select Airline companies which remain long-term winners. Some investors hate airlines and excellent case in point is Warren Buffet himself who once called the industry a "death trap for investors”. However, today he is the largest shareholder with investments of more than $8 billion in the four largest US Airline companies. The sector and even these winners will need new capital, and if you play your cards right, you will be assured of high ownership percentages and front seats with the decision-making rights.

There is a precedent of this during the Global Financial Crisis of 2008/2009 when Warren Buffett bet on Goldman Sachs during one of its darkest moments and was one of the first investors to pour $5 billion into the company. The decision was termed questionable at the time, but he made $3.1 billion on that decision within a very short period of three years. Another example is Financier David Bonderman who turned a $66 million investment in Continental Airlines in 1993 into $780 million by 1998.

GOVERNMENT INVESTMENTS IN THE PAST HAVE PAID OUT HANDSOMELY

The idea of federal bailouts of large and economically important corporations which find themselves in serious financial distress is not new and if we look at the past few recessions, Airlines are among the industry groups that outperform significantly after a recession.

After 9/11, the US government was concerned was about the commercial viability of Airlines and the Air Transportation Stabilization Board (ATSB) was created which then issued $10 billion in Federal Loan Guarantees. They approved some Airlines and denied others, and the speed at which the Airlines paid back the loans/ guarantees in the past can be comforting. At the time, lawmakers were criticized for wasting taxpayer money on sick and even dying airlines but taxpayers made lots of money on the deal. Of course, they separated the winners from the losers and many Airlines were rejected and the guarantees also didn’t come cheap with the Government insisting on owning a piece of the airlines through stock warrants or company's common stock depending on default risk. 

As an example, America West received a loan in 2002 of $429 million in exchange the government received warrants to purchase shares in the company. In 2004, the government exercised the warrants (bought at $3 a share and sold at $10 a share) making $130 million on that transaction in two years.

US Airways, Transair, Aloha Airlines, Frontier all had similar transactions and in every single case the Government made money. If you go back and see how well government did with Airline investments, we can see how sound the investment is. I anticipate it will play out similarly this time as well for any patient long-term investor including Governments who are bailing out and providing rescue packages to distressed balance sheets with strong long-term future.

AN EXCELLENT TURNAROUND BET

Airline investments are speculative and leveraged way to play the market – either on the upside or downside. As expected, they are bearing the brunt of the markets’ coronavirus fears and the stocks are trading at distressed levels. Airlines before Covid-19 were more profitable than any other time in history and the crisis will result in future consolidation and efficiency as the weak give way to stronger brands and franchises.

Private Equity has already sensed the opportunity by entering the aircraft finance market, and we will see others follow suit in due course of time. Either way, while most are keeping their distance from the industry, this could be a time to buy for for when things do eventually turn around and one can expect to make multiples of their original investment.

CONCLUSION

COVID crisis is not the fault of Airlines which does a very important and extraordinary job for and on behalf of governments. People too will want the airlines to keep flying. With most Airline stocks on their knees and the short-term outlook looking poor due to COVID-19, if you can look further out, the pandemic could lead to new opportunities for investors to profit from the recent sell-off. Although it is very hard to look into the crystal ball at this point and see clearly, eventually travel restrictions will be lifted, and demand for flights will pick up again. Consumers and businesses alike will resume their lives and if you can handle the turbulence maybe you have an investment opportunity of a lifetime with Airlines.