Insights

June 2020 Market Recap

Airlines continued to weather the coronavirus-induced travel demand slump as the number of infections continues to grow. On the other hand, gold had its best quarter in four years. Futures for the yellow metal topped $1,800 an ounce for the first time since 2012, as the ongoing global pandemic boosts demand for perceived “safe haven” assets.

Click the buttons below to read our recap of the airline sector and gold market for June 2020.

Strengths
  • U.S. airlines, as measured by the S&P 500 Airlines Index, had the biggest week of gains ever – up an astonishing 35 percent for the five trading days ended June 5. On June 4, American Airlines stock exploded 41 percent alone after announcing it would increase July flights by 74 percent compared with June. Several airlines rallied in early June as the number of coronavirus cases globally appeared to slow. However, that trend reversed later in the month.

American Airlines Rose 41 Percent on June 4

  • According to OAG Aviation Worldwide, airlines added the most seats since the coronavirus outbreak began for the week ended June 30. Globally carriers added 8.2 million seats to capacity, which is a 21 percent increase from the week prior. Analyst John Grant said, “the arrival of July and the summer season has a feeling of optimism at least for the aviation industry.” Bloomberg notes that Chinese domestic capacity is now at 86 percent of pre-pandemic levels.
  • Ethiopian Airlines, Africa’s largest and consistently profitable carrier, said that it expects to remain profitable for its fiscal year ending in July, reports Bloomberg. CEO Tewolde Gebre-Mariam said, “we may not be as profitable as we expected but we registered some profit.” Revenue from cargo allowed the carrier to maintain monthly fixed payments of $120 million to $150 million to service loans, aircraft leases, salaries and rentals.
Weaknesses
  • The International Air Transport Association (IATA) predicts that globally carriers will lose a combined $84 billion this year and $16 billion in 2021. The estimate is significantly greater than the $31 billion lost during the 2008-2009 recession. IATA CEO Alexandre de Juniac said “there is no comparison for the dimensions of this crisis.” In the U.S., spending on travel is not expected to fully recover until 2023.

spending on travel in the U.S not expeced to fully recover until 2023

  • As carriers cancel thousands of flights, fewer jets will be in operation and aircraft are being retired at an accelerated pace. Lufthansa said its fleet of Airbus SE A380s will be parked for at least two years and may never return to service as demand for long-haul travel remains subdued, reports Bloomberg. Long-haul aircraft are at risk of demise as smaller, more efficient jets are available. However, Emirates had said it will resume flying its A380s to London and Paris.
  • Carriers were luring passengers by leaving middle seats unsold to promote social distancing amid the pandemic – but it seems that trend was short-lived. American Airlines said it would start selling flights to full capacity starting July 1. United Airlines was criticized for misleading passengers about its booking practices. Travelers thought United would leave middle seats opens, similar to what other carriers implemented, but many were shocked to be on full capacity flights.
Opportunities
  • Several European countries are tying airline aid to lower-emission travel by raising ticket prices and reducing short-haul flights. Bloomberg News notes that Air France, which received a 7 billion-euro package, is cutting domestic services by 40 percent and slowly cutting services between cities less than 2 and a half hours by train. Although such steps might seem negative because it encourages different means of transportation, the reductions in flights and hike in ticket prices could help carriers lean out. A reduced number of flights is positive for the goal of achieving lower carbon emissions.
  • Carriers globally are making plans to return to profitability, secure government aid and lure investors. Analysts are particularly optimist on Qantas Airways. Bloomberg notes the Australian carrier is taking the following steps: raising $1.3 billion, cutting 20 percent of its workforce and keeping the largest aircraft idle for three years. Morgan Stanley analysts say that even with share dilution from raising capital, they expect a faster return to “normal profitability”. Jefferies notes that the Qantas has a strong position in the Australian market.
  • Vistara, jointly owned by Singapore Airlines and Indian conglomerate Tata Group, could gain a share of the Indian travel market. India doesn’t allow foreign airlines to directly fly passengers to a third country, which allows Vistara to provide non-stop connections overseas and lure passengers away from Emirates and Etihad, the current major players, reports Bloomberg. Vistara chief commercial officer Vinod Kannan expects long-haul international travel demand to rise when travel restrictions lift. “There will be an increase in the number of people who want to travel direct, say, from India to Europe, because they don’t want to transit through another hub that increases travel time, that increases exposure.”
Threats
  • With a resurgence of COVID-19 cases, particularly in the U.S., airlines’ optimism heading into mid-summer has vanished. Delta said it will likely stop adding flights to its schedule after adding 1,000 flights in July and August. The U.S. saw over 41,000 new coronavirus cases on June 29 alone, spiking fears that the resurgence in travel demand and economic recovery was short-lived. The number of infections has also risen drastically in Latin America.
  • Because of this resurgence, travel bans are returning. The European Union said it will open its borders to visitors to 15 countries as of July 1, but not to travelers coming from the United States. This is in stark contrast to the U.S. being the first country to bar visitors from the EU in March as the pandemic spread across Europe and shows that as one area of the globe recovers from the virus, another can succumb to it.
  • One ongoing threat is for the aviation industry. One in 15 jobs in America is related to airlines, and a sustained period of job cuts could mean long-term economic pain. Airlines, and manufacturers, continue to announce tens of thousands of layoffs as air travel has plummeted and shows no sign of near-term recovery. Pilots aren’t racking up as many hours, risking the need to re-train. The British Airline Pilots Association notes that to maintain “recency”, commercial pilots must perform three takeoffs and landings within 90 days.