Insights

May 2020 Market Recap

Airlines continued to weather the COVID-19 storm as a return to normal travel levels appears to be further away. On the other hand, investor interest in gold increased during the month as volatility returned to the markets.

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

Strengths
  • Space travel made a big leap forward in May. A private company, SpaceX, for the first time launched two astronauts into orbit nearly a decade after the U.S. government retired the space shuttle program. The Falcon 9, carrying a Crew Dragon capsule, was launched on Saturday May 30, and arrived at the International Space Station the next morning carrying two American astronauts. The successful launch is one step closer toward space tourism and commercial flights. Both SpaceX and Boeing were awarded contracts for the Commercial Crew Program in 2014, and Boeing could soon too achieve the mission of getting astronauts to space.
  • The number of passengers screened daily in the U.S. by the Transportation Security Administration (TSA) has steadily been gaining momentum. On May 31, nearly 353,000 people boarded commercial flights in the U.S., up 303 percent from a low of 87,534 people on April 14, and well above the 10-day moving average.
  • According to government figures, the bulk of the $25 billion in aid for employees at passenger carriers went to the four biggest airlines: American, Delta, United and Southwest. Bloomberg notes that 90 other companies have received funds under the payroll aid program, including luxury charter carriers. As of May 29, none of the carriers had actually tapped into those funds. Bloomberg reports that the carriers plan to wait until fall and see how the summer travel season goes before deciding to take the government aid. This demonstrates optimism from carriers that travel demand could recover faster than expected.

top four carriers get bulk of COVID-19 AID

Weaknesses
  • Perhaps the biggest news for the airline industry in May was that legendary investor Warren Buffett sold all his positions in major U.S. carriers. Buffett’s Berkshire Hathaway announced in its annual meeting that sales of shares in Delta, Southwest, American and United made up most of the company’s $6.5 billion April equity sales. At the end of 2019, Buffet’s stakes in the big four carriers neared $10 billion, with greater than 10 percent ownership stakes in Delta and Southwest. “The airline business – and I may be wrong and I hope I’m wrong – but I think its changed in a very major way. The future is much less clear to me,” said Buffett.
  • Airbus reported just nine net orders in the month of April and delivered only 14 jetliners. More and more airlines are conserving cash and delaying accepting new planes. Airbus already cut output targets for the year by a third. Rolls-Royce lowered its delivery target for wide-body plane engines by 44 percent for the year. Boeing, which was suffering long before the coronavirus erased travel demand, reported more than 300 cancelled orders so far in 2020.
  • A Pakistan International Airlines flight with 99 people on board crashed into a residential neighborhood on May 22 after pilots reported losing power from both engines as the plane neared landing, reports Bloomberg. At least two passengers survived the crash and many on the ground were killed or injured. The flight was from Lahore to Karachi, Pakistan and was on a A320 narrow-body jet that entered service in 2004.
Opportunities
  • Despite Buffett exiting the airline space, investors and traders are not deterred from investing in airlines, viewing it as an attractive buying opportunity. The U.S. Global Jets ETF (JETS), which invests in global airlines, airport operators and manufacturers, saw strong inflows even after the Buffett news was released. From May 1 to May 27, investors added $182.14 million to JETS – a sign that investors are betting on a travel turnaround.
  • Private air travel could be making a comeback, according to Signature Aviation Plc. CEO Mark Johnstone said “encouragingly, we have seen some early signs of an improvement.” The company said flight activity that fell 77 percent in April from a year earlier was down only two-thirds in the first 13 days of May.
  • Airlines are taking big precautions to help make passengers feel safe flying again. JetBlue was the first major carrier to require all employees and travelers to wear a face mask throughout the journey, and other carriers quickly followed suit. Delta is one of many leaving middle seats unoccupied to increase the distance between passengers. Airlines are also allowing passengers to reschedule their trips for free if a plane reaches a certain capacity level. Hopefully these measures, along with the falling number of COVID-19 infections, will get more people in the skies.
Threats
  • The International Air Transport Association (IATA) warned that demand for flights will lag behind pre-coronavirus forecasts for at least five more years. Brian Pearce, the group’s chief economist said that global traffic will still be 10 percent below original estimates in 2025. The IATA doesn’t expect travel rebounding to 2019 levels until 2023 at the earliest.
  • American Airlines and EasyJet both plan to cut management and staff by 30 percent. These are just a few of the carriers announcing massive job cuts to stem losses from drastically reduced travel. Delta Airlines is offering new retirement programs to entice workers to leave voluntarily as it anticipates a slow recovery in demand. Latam Airlines, the top South American carrier, has filed for bankruptcy and more carriers could be headed in the same direction soon. Boeing CEO Dave Calhoun said on NBC that the travel recovery is going to be slow and there is a risk that a major American airline could fail.
  • U.S. and China tensions heated back up in May. China will allow chartered passenger flights from eight countries as it loosens restrictions on inbound travel, but the U.S. will not be included, reports Bloomberg. Although positive that China, and other countries, are easing coronavirus travel restrictions, this is negative for U.S. carriers in losing out on service to the populous nation.

The outbreak of the COVID-19 pandemic and the resulting actions to control or slow the spread has had a significant detrimental effect on the global and domestic economies, financial markets and industries, including airlines. U.S. Global Investors continues to monitor the impact of COVID-19, but it is too early to determine the full impact this virus may have on commercial aviation. Should this emerging macro-economic risk continue for an extended period, there could be an adverse material financial impact to the U.S. Global Jets ETF.