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Pain Is Just Beginning For Airlines

Mar. 04, 2020 7:20 PM ETU.S. Global Jets ETF (JETS)AAL, DAL, IYT, LUV, UAL, XTN24 Comments


  • The U.S. Global Jets ETF has sold off more sharply than the rest of the market.
  • The impact of the coronavirus outbreak will last well beyond the next few earnings reports.
  • Airlines will need to engage in aggressive price competition to convince customers to return.
  • A second wave of the virus is likely, and it will be especially problematic for airlines.
  • There are likely to be additional negative surprises for airline stocks.

The coronavirus outbreak is proving to be devastating for airlines. The airline industry, best represented by the U.S. Global Jets ETF (NYSEARCA:JETS), has been hit harder than the broader market and so far has failed to bounce back at all.

Source: Thomson Reuters Eikon

JETS is now 27% off its 52-week high. Is this an opportunity to "buy the dip" and bet on a recovery? Unfortunately, it looks like the pain is just beginning for airlines. The coronavirus outbreak is likely to have lingering effects on the industry. Given the capital-intensive nature of running an airline, the industry lacks the agility to respond. If there is a second wave of cases like there was with prior pandemics, it will be especially problematic for airlines.

Also note that broader transportation ETFs such as the iShares Transportation Average (IYT) and the SPDR S&P Transportation ETF (XTN) are vulnerable for similar reasons. However, in this article, I will hone in on the impact on airlines. JETS has a relatively concentrated portfolio, with 89% of its assets in airlines and the top 4 holdings accounting for 47% of total assets.

JETS Balance Sheets

The average airline has net debt/LTM EBITDA over 6 according to Thomson Reuters. Southwest Airlines (LUV) is a rare example of an airline with more cash than debt. In contrast, American Airlines (AAL), one of JETS' largest holdings is more sensitive to disruption because it has net debt/EBITDA of 13.68. Delta Air Lines (DAL), United Airlines (UAL) both have leverage slightly below industry average. A sharp dropoff in passengers will cause a spike in net debt/EBITDA for the entire airline industry. Many airlines will be forced to focus on paying down debt and have limited ability to operate strategically in a crisis.





Southwest Airlines


This article was written by

Much more than closed end funds, look for hidden value, especially in investment companies and macroeconomic or industry dislocations.Areas of focus include: -NAV discounts-Liquidations-Fund restructurings-Income strategies-Shareholder activism-Macro opportunitiesI previously submitted individual stock research on Seeking alpha under the (no longer active) Afanti Arbitrage account.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (24)

Too early to buy.Also be careful for coming bankruptcy.A British flyer went broke the other day.Victim number 2 will probably be a Norwegian entity.Be careful
Warren Buffett owns 10%+ in all those major banks and was even adding to DAL

People are still flying, flights are still packed even today

The White House has been talking about stimulus and bailouts for the airlines and other sectors which would really destroy the shorts

Add in fuel from gas has dropped nearly 20% and he airlines are a steal at these prices...I will message you 6 months from now when I am very rich from this dip
I added significantly to my DAL holding bringing my avg to $50 and change for those very reasons.
Watching and waiting
Any bets on which of these airlines will be forced into bankruptcy? Spirit and United? Forget about AA dividend; that's toast.
chiero profile picture
None will be forced into bankruptcy, not even close.
anomaly1 profile picture
"While the 2009 H1N1 outbreak occurred as markets were recovering from the global financial crisis, the coronavirus outbreak started at a time of record high valuations. The market is now much more sensitive to declining expectations."


2nd wave? I doubt it will make a difference.
Yeah, the dates.
You might want to revise the dates you listed for the Spanish Flu....."Spring 1918, Fall 2018, and Winter 2019"
Closed End Fund Tracker profile picture
fixed the dates, thanks for pointing out
u r right.
OverTheHorizon profile picture
“Aggressive price competition “ will only further devastate the airlines. It is a demand issue— there isn’t any; at any price for all but a relatively few adventurers.
Diesel profile picture
I'm certainly not flying anywhere anytime soon but once virus goes away, airlines will be a great buy.
OverTheHorizon profile picture
Single digits for some (AA).
Diesel profile picture
If they fall to a P/E of 2-3, they might as well go private.
Closed End Fund Tracker profile picture
that would be an awesome bargain if they drop that low
“For example, the Spanish Flu epidemic, which is the most severe pandemic in modern history, had three waves: Spring 1918, Fall 2018, and Winter 2019.” Didn’t know that 1/3 of the worlds population died off back in Fall of 2018. You might want to edit article with the correct dates. I assume this was an auto correct issue.
waltertcochran profile picture
You are so right...what is happening is very much like “behavior contagion.” Articles like this do not help 
the ongoing situation.
No what is happening is companies with poor capital structures are getting punished. It has begun with UAL announcing cuts to domestic flights.
Everyone's a virologist these days.
So let’s be clear here. You seem to use the terms “epidemic” and “pandemic” interchangeably. Covid 19 is neither as of today.
It is, global "leaders" just won't admit it.
It is not even close to qualifying for even epidemic status, let alone pandemic. Roughly 100k cases worldwide is not "affect(ing) a disproportionately large number of individuals within a population" (from Merriam-Webster.) The flu is far more prevalent and isn't considered an epidemic. If you assume the number of reported cases is off by an order of magnitude and will grow by another order of magnitude beyond that and all of those people were only in China, it still wouldn't be an epidemic.
... "not even close..." what is your reference for this call. CDC and WHO have been saying, not yet but worried. Please quote current experts.
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