Given that as of July, 2,535 Boeing (NYSE:BA) and Airbus aircraft, or 14.2% of the world’s fleet, were in storage one might conclude that this is not the best time to be in the airline business. But as with so many of the things we have witnessed during the unfolding of the credit crisis and the subsequent slow repair of the damage, logic can be your worst enemy.
Two of the most striking examples of this came recently as Delta Air Lines Inc. (NYSE:DAL) raised $1.5 billion in loans and bonds, which was followed just a day later by AMR Corp (AMR), the parent of American Airlines, securing of $2.9 billion in financing. DAL is rated Ba2 by Moody’s and BBB- by S&P. AMR is rated Baa3 and BBB respectively by the two agencies.
There are few out there, I’m sure, that one year ago today, as the credit markets were frozen tighter than Antarctica, would have believed that $4.4 billion could be raised over a two day period for companies in an industry that seem to do little else besides lose money and baggage.
The view from Thomas Horton’s seat, who is AMR’s CFO, is of clearer skies:
Capital markets are still constrained and there’s plenty of difficulty. But I think for companies with a good franchise and a track record, there is good access.
Not only are the two carriers able to raise money, but in true American “bite off more than you can chew” fashion, they are in a bit of a dust up over who is going to acquire Japan Airlines Corp. (OTC:JALSY), the struggling national carrier from the Land of the Rising Sun. JAL recently announced a 14% reduction in its work force as it struggles to survive as an independent carrier.
Haruka Nishimatsu, JAL’s CEO, said the company will reduce its 48,000 head count by 6,800 and that the company will pursue a “drastic” reorganization of its routes. With regard to a possible combination with one of the American carriers, he did not name names but did say he expected to conclude talks by mid-October.
This all comes at a time when the International Air Transport Association (IATA) is expecting industry wide losses of $11 billion dollars this year up from the $9 billion it previously forecast. Losses for 2010 are expected to total $3.8 billion. Both this year’s and next year’s losses are an improvement over last year’s $16.8 billion loss for the industry. One cause is the 20% drop in premium passenger traffic vs. a 5% drop in the back of the cabin. The decreased demand for high-priced seats is expected to push revenue per passenger down by approximately 12%.
So if the good news is that certain airlines can raise money and the bad news is just about everything else I written this morning, what’s happening with the stocks?
The CEC Strategy tracks AMR, CAL, DAL, JBLU, LUV and UAUA and currently has a long position in every one of these names. The long positions were initiated during the first week of September and as of last night's close, the P/L in order of appearance was 34.98%, 17.92%, 19.14%, 8.75%, 10.90% and 23.68%.
As loyal readers know, long positions are only established when CDS levels are declining and stock prices are rising. As such, it would appear that Mr. Market is focused much more on the good too come than the bad that has passed.