Insights

Third Quarter Market Recap

Although the third quarter was filled with continued negative updates surrounding Boeing and its troubled 737 MAX jets, there were pockets of positive news. Several airlines reported strong quarterly earnings and a new record emerged for the longest commercial flight.

For the quarter ended September 30, gold outperformed stocks. The yellow metal returned 3.8 percent while the S&P 500 returned just 1.7 percent. Higher metal prices did dampen jewelry demand in both China and India, the world’s two largest consumers, but it didn’t stop central banks globally from adding to their gold reserves.

Click below to read our recap of the airline sector and gold market from July to September 2019!

Strengths
  • Delta Air Lines reported stellar earnings for the third quarter. Net income rose 13.1 percent year-on-year to $1.5 billion, or $2.31 per share. Operating cash flow was $2.2 billion, up an incredible 50 percent from the same three-month period a year earlier. Delta returned $470 million to shareholders through dividends and share buybacks during the quarter.
  • Spirit Airlines announced that it has signed a deal with Airbus for the purchase of 100 new Airbus A320neo Family aircraft, with the option to buy up to 50 additional aircraft. The jets are planned for delivery through 2027. Spirit President and CEO Ted Christie called the order “another milestone” for the low-cost carrier, which is the fastest growing airline in the U.S. What’s more, the carrier will unveil its new cabin redesign in December 2019, complete with new, more comfortable seats and extra legroom.
  • Global flight demand, as measured by revenue passenger kilometers (RPKs), edged up a modest 3.8 percent year-on-year in August, according to the International Air Transport Association (IATA). China saw the fastest demand growth of any region, at 10.1 percent, though this number was down from 11.7 percent annual growth in the previous month. The most impressive stat from IATA’s monthly report was that the industry-wide load factor reached a new all-time record for August. The passenger load factor, which measures how efficiently a carrier fills seats and generates revenue, registered 85.9 percent, up a tick from the same month last year.
Weaknesses
  • Investigators from the Indonesian National Transportation Safety Committee officially put the blame on the Boeing 737 MAX for the downing of the country’s Lion Air flight last year. After months of investigation, officials said Boeing was at fault for “introducing an automated system in the MAX without adequately briefing airlines and their crews about its existence or instructing them how to override the software should it malfunction,” writes the New York Times. The report undercuts Boeing’s insistence that pilots should have been able to deal with the software malfunction using standard emergency procedures.
  • Boeing’s earnings took a major hit in the third quarter and the first nine months of the year. The manufacturer reported net earnings of $1.2 billion in the three months through September 30, more than half of what they were a year earlier. As for the nine-month period through September, net earnings were $374 million, down a whopping 95 percent from the $7.0 billion the company made in the same period in 2018. Operating cash flow for the quarter was negative $2.4 billion, reflecting lower deliveries of its 737 jet as well as advance payments.
  • Alaska Airlines and American Airlines scaled back their shared rewards program for the second time in the third quarter, a move that will likely raise the ire of some frequent fliers who have taken advantage of the partnership over the years. What this means is that passengers may no longer redeem their Alaska rewards points on American flights, and vice versa. When asked for an explanation, an American spokesperson said the cuts were put in place after a “review of its airline partners and programs.”
Opportunities
  • United Continental raised its earnings forecast for the remainder of the year as travel demand continues to climb. Thanks to another quarter of expanding pre-tax margin, the carrier has “further confidence to raise our full year 2019 adjusted diluted EPS guidance, putting us ahead of pace to achieve our goal of $11 to $13 in adjusted diluted EPS by the end of 2020,” United CEO Oscar Munoz stated.
  • American Airlines announced it will be spending $100 million on a new parts distribution facility at its main hub, DFW International Airport. The project, construction for which will begin this fall and take between 12 and 18 months, will help speed up the delivery of parts across the carrier’s supply chain. “This new facility will provide ample space to store parts, which enables us to select parts up to 75 percent faster than we currently can, minimizing any potential maintenance delays,” an American spokeswoman told the Dallas Morning News.
  • Australia’s Qantas Airways successfully completed its test run of a 19-hour nonstop flight from New York City to Sydney, a route that some analysts believe will revolutionize air travel. For one, regulators will need raise the cap on pilot duty time from its present 18.5 hours for the Qantas route to be regularly scheduled. “This is the last frontier in commercial aviation,” commented Qantas CEO Alan Joyce.

Threats
  • Congress is set to ratchet up its scrutiny of Boeing leadership as new details emerge suggesting management put pressure on company engineers to certify their own systems. The House Transportation and Infrastructure Committee will be investigating such conflicts of interest that are believed to have contributed to the crash of Indonesia’s Lion Air flight in October 2018. In related news, a Southwest Airlines pilots union have filed a lawsuit against Boeing, saying the manufacturer misled pilots. The group is seeking some $100 million in lost income from Boeing since the group believes it was the company’s negligence that led to the grounding of its 737 MAX aircraft. Boeing maintains that the MAX will return to service by the end of the year.
  • Operating margins for U.S.-based carriers will contract for the third straight year in 2019 due to oversupply, according to Oliver Wyman’s most recent economic analysis. With flight demand rising worldwide, airlines have added capacity and new routes at a rapid pace, making pricing more competitive and putting pressure on yields. As such, margins are expected to narrow to between 5 and 6 percent by the end of the year, down from 9.2 percent in 2018 and 12.7 percent a year earlier.
  • The International Monetary Fund (IMF) revised down its growth forecast for the world economy to just 3 percent, its lowest level since the financial crisis. In addition, odds of a full-blown recession are the highest they’ve been in more than a decade. Slower economic growth could dampen air travel demand.

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Revenue passenger miles (RPMs) and revenue passenger kilometers (RPKs) are measures of traffic for an airline flight, bus, or train calculated by multiplying the number of revenue-paying passengers aboard the vehicle by the distance traveled. The S&P 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value.

For information regarding the investment objectives, strategies, liquidity, risks, expenses and fees of the VanEck Vectors Junior Gold Miners ETF, please refer to the prospectuses for that fund. Quasar Distributors, LLC is not affiliated with the VanEck Vectors Junior Gold Miners ETF. GDXJ is distributed by VanEck Securities Corporation. References to other funds should not be interpreted as an offer of these securities.

Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business. Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability. The Bloomberg US Treasury Bond Index is a rules-based, market-value weighted index engineered to measure the performance and characteristics of floating rate coupon U.S. Treasuries which have a maturity greater than 12 months.