Coronavirus pushed global travel to a rapid halt. Airlines, the backbone of this delicate industry, were all enjoying a great year going into the pandemic. Revenues were growing beyond historic highs, fleets were expanding, and profitability was a safe expectation. Low oil prices only added to bullish sentiment with lower cost inputs. Fast forward to this week, and the conversation instead features speculation over airline bankruptcies even after billions has been received in federal aid. Quite the change.
All ancillary travel industries: hotels, casinos, cruise ships, rental car companies, travel agencies and more have felt similar pain in disappearing demand and massive stock drops. This could certainly continue, as most of us have little experience measuring a pandemic’s effect on global movement. For shorter-term investors, it is anyone’s guess as to how travel demand recovers in the coming months. We have small signs of improvement, but none large enough to make me confident. Picking that elusive bottom is not a game I want to play.
For those willing to use a longer time horizon, consider Boeing (BA -0.43%). David Calhoun, CEO of the plane maker, was quoted this week discussing a five-year timeline for demand totally recovering, longer than one may hope. In this scenario of extended weakness, it is vital to pick the most durable companies. There will be airlines that cannot overcome extended weakness and their equity will be wiped out. They will still exist and demand new planes, but with new owners and lower cost structures. With Boeing’s defense business still rocking and credit resources plugging temporary needs for operations, Calhoun’s company is equipped to avoid that outcome.
I am much more comfortable assuming air travel will recover at some point than picking which airlines will take the biggest piece of the pie. Planes will once again be flown at scale, even if some airlines no longer exist.
Boeing’s daunting reality currently features a 737 Max grounding and coronavirus stopping travel. The result: 80% of plane maker’s equity value erased since last year. Through all of this, their plane backlog remarkably sits just under 5000. The order book did take an 18% hit over 18 months but still offers Boeing years of deliveries to execute. With virtually no air travel occurring and their best plane grounded, some may wonder how did it not fall further?
Whenever we finally are in a world resembling normalcy, Boeing will again be one of only two commercial aviation producers in the world. Boeing & Airbus will still enjoy an extremely inelastic market demand thanks to limited supply. If airlines want planes in the future, they must stay in line today, or risk shortages when eventually needed. This seemingly enviable position for Boeing was made even stronger by recent fundraising.
For Calhoun’s company, liquidity is no longer an issue. The plane maker’s recent bond offering was seven times oversubscribed by investors, showing immense faith in the long-term prospects for the company. Importantly, the $25 billion raised guarantees they will not need government aid and therefore will not be subjected to the strict covenants and equity dilution coinciding with it. Calhoun is confident that even in gloomy scenarios this money is sufficient to stomach the pandemic, which may not take as long as some think.
Dr. Toni Fauci, in a senate hearing this week, expressed confidence in our biotech industry’s ability to have an approved vaccine by year end. Just weeks ago, the timeline stretched 18-24 months. This is not a politician, or a CEO talking up an agenda or product. It is a straight shooting, usually pessimistic, world renowned expert in infectious disease. Eliminating mortality risk from coronavirus would be the ultimate game changer for travel; this would do it. If we truly are just six months away from a vaccine, I think Calhoun’s timeline for air travel recovery is too negative.
In the most recent earnings report Boeing executives expressed complete confidence in returning to a market equilibrium that demands far more planes than can be made. Before being struck by two catastrophic crises, Boeing was able to generate 10 billion in net income. They enjoyed growth in both demand and profitability metrics consistently beating the market. This was a cash generating machine.
It will certainly take years for Boeing to approach previous levels of strong profitability. Regardless, a wildly successful bond offering ensures their future existence, and lack of competition ensures success. My investment idea is not for the faint hearted. Boeing is still a broken business that will need time to remedy. The stock will most likely resemble a roller coaster rather than a lazy river throughout this extended comeback. In the meantime, I will be a buyer on price weakness and remain confident Boeing is a vital piece of the future global economy. Buckle up, this one could take a while!
