WHAT’S NEW- Airlines are among the main victims of the COVID-19 crisis. In the US, airlines have only a few days left to make up their minds whether they will take up governmentbacked loans to survive. Trying to avoid these onerous loans, some airlines have turned to their frequent flier programs to back the issuance of new bonds.
OUR TAKE - The mere fact that US airlines need their frequent flyer programs to survive shows the depth of the crisis. As such, frequent flyer programs represent solid collateral. They take in billions by selling miles to banks that then use these miles to reward customers that use their credit cards. These miles may never be redeemed, or only after many years, making the programs cash-rich. The CARES act provided up to USD 25 billion in payroll grants to keep workers employed in the airline industry and another USD 25 billion in loans to cover general costs. The loans included restrictions on executive pay and dividend payments as the Treasury Department did not want to be seen as bailing out an industry that had spent billions on stock buybacks in recent years. The airlines have until 30 September to tap the loans, while the grants will only be extended if Congress passes another stimulus bill. Without more grants, there will be more furloughs. United Airlines could furlough 36 thousand employees and American Airlines 19 thousand. Interestingly, on Monday, when Delta Airlines announced its frequent flyer-backed bond issue, Amazon presented plans to hire 100 thousand workers in the US and Canada for its warehouse operations.
WHAT’S NEXT - We will continue to monitor closely the developments with regard to new US stimulus bills as the US economy needs further support.
CONCLUSION - The COVID-19 crisis is creating clear winners and losers. Investors should avoid the latter until it is clear which companies can survive the crisis without serious damage to their business model and prospects. We invite you to contact your client advisor if you wish to discuss the composition of your investment portfolio.