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Treasury Secretary: Time to End ‘No-Strings-Attached’ Bailouts

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coronavirus economic impact on airline less than 9/11 attacks

Treasury Secretary Steve Mnuchin demands loan grantees to pay back a part of the grant money. This is in addition to the government receiving equity warrants in the companies equal to 10% of the grant value. This move sends a clear message that the government won’t allow “no-strings-attached” bailouts to the major airlines.

This approach stands in clear contrast to the corporate bailouts during the Great Recession. In those bailouts, Ben Bernanke, the Federal Reserve Chairman then, loaned trillions to Wall Street banks. He did so with absolutely no requirements attached to the money – they could do with it whatever they pleased – including using it to go out and buy other banks.

Airlines Express Concern

It should come as no surprise that some airlines don’t like the deal. They say they didn’t agree to it in the original aid package. Also voicing concerns are a handful of labor unions and lawmakers. They expressed their concern that paying back the grants could prove too difficult for the airlines. They say this will likely become the case if the demand for air travel is slow to return.

But many feel that Mnuchin is trying to avoid the stigma of “bailouts” altogether. Many also notice that he’s sending a strong message to all companies who may come looking for relief. He wants to emphasize that the government isn’t going to provide money unconditionally.

“It is our objective to make sure, as I have said, that this is not a bailout,” he said last week in a CNBC interview. He said that they aim to ensure airlines “have the liquidity to keep their workers in place” instead.

Alex Ginsberg, a partner at Pillsbury Winthrop Shaw Pittman, added: “I think Treasury seems to be responding strongly to the negative perceptions of government stimulus during the last financial crisis and they’re redoubling their efforts to make sure federal money is spent responsibly.”

David Leblang, a professor of politics and public policy at the University of Virginia, agrees.

“I would not undersell, especially in an election year the raw feelings associated with the bailouts that have come from TARP (the Troubled Asset Relief Program during the financial crisis). The optics are horrible if there are no strings attached.”

Drawing the Line on Bailouts

It’s understandable then, why Mnuchin is drawing a wide line in the sand at the beginning of what appears to be a long line of industries and companies looking for relief.

Mnuchin is clearly trying to dissuade companies from testing the waters. He does so by establishing from the onset that there will be no free rides. He also stands firm that the government expects grantees to pay back at least a portion of the grant. This is in addition to a potential equity stake in the companies via warrants.

What remains to be seen is if Mnuchin holds firm on his requirements if the economy begins to stumble and the line of companies looking for relief grows.

Already, the Democrats are starting to make noise about the process taking too long.

Leading Democrats, including House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer, urged Mnuchin on Sunday to drop any demands that could delay the deal and put jobs at risk.

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As Airlines Suffer, American Most Likely To File Bankruptcy

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As Airlines Suffer, American Most Likely To File Bankruptcy

A few weeks ago, Boeing CEO Dave Calhoun startled the airline sector when he said a major airline would go bankrupt by Halloween.

“I don’t want to get too predictive on that subject. But yes, most likely,” Calhoun said. “Something will happen when September comes around.”

Airline stocks plunged as investors and analysts scrambled to determine which airline became most vulnerable.

RapidRatings, a risk assessment firm, recently completed a comprehensive stress test on the major U.S. airlines. They used dozens of variables including debt loads, cash flow analysis, and a loss of at least 15% of revenue.

American Airlines To Suffer The Most?

We may never know which airline that Calhoun was alluding to. Although, RapidRatings’ analysis says that American Airlines is the most likely to go bankrupt in the coming months.

The company also looked at Delta, United and Southwest, but none of them are in such dire circumstances as American.

In an interview with Yahoo Finance, RapidRatings CEO James Gellert said, “American is the most at risk and that’s it in every way you look at it. American stands out as the weakest of this cohort.”

The stress tests run by RapidRatings produce both a short term financial health rating (FHR) and long term core health score (CHS). According to RapidRatings, the FHR measures a company’s short-term resiliency and default risk. Meanwhile the CHS analyzes risk and company efficiency over a three year period. A score lower than 40 means a company is at risk of failing.

Gellert says the analysis has more than a decade of proven results. Also, “over 90% of companies that failed have been rated 40 and below on our scales.”

The stress tests found that American was the weakest U.S. airline going into the recent pandemic. It has a financial health rating of 59 and core health score of 66.

As the pandemic unfolded and air travel plunged 90%, American’s FHR score plunged to 29. Meanwhile, its CHS score fell to 27.
Gellert added that “I would be quite certain that is the airline in the crosshairs of the Boeing comment.”

The Future Of American

American, in response to the sub-40 stress test scores, said in a statement that it was “focused on rightsizing the airline for the current environment, and plan to reduce our 2020 operating and capital expenditures by more than $12 billion.”

Analysts, however, are starting to smell blood in the water. Cowen equity research analyst Helane Becker recently told Yahoo Finance, “American’s liquidity position is dependent on government aid, bucking the trends we’ve seen from other airlines. The company is receiving a total of $10.6 billion … [and] we expect another capital raise” in the 3rd quarter.”

Savanthi Syth, an equity analyst at Raymond James, also agrees American will need more capital to weather the storm. “I mean, if you look at the cash on hand that’s definitely the case,” Syth said. American has six months of cash on hand, United has 10 months, Delta has 12, and Southwest has almost 19 months, according to Raymond James.

Syth added, “I don’t think bankruptcy is a foregone conclusion… it’s just going to take longer for American to kind of dig themselves out of this kind of debt burden, and therefore equity could be challenged in the near term.”

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Boeing Loses More Plane Orders, CEO Says Major Airline Will Go Bankrupt

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Boeing Loses More Plane Orders, CEO Says Major Airline Will Go Bankrupt

On the same day that Boeing announced that it lost another 108 orders for its 737 Max aircraft, its CEO made a startling prediction about the airline industry.

Today’s announcement adds to a steady flow of canceled orders for the 737 Max. The model has been grounded for the last 14 months following two fatal crashes. The said crashes took 346 lives in late 2018 and early 2019. Year-to-date, Boeing has lost a little more than 500 orders for the 747 Max. Additionally, the company hasn’t added a single new order in months.

Boeing says the backlog for the plane has slipped to 4,834, down from 5,049 orders just last month. That’s the smallest backlog since 2013 as the travel industry grapples with the ongoing coronavirus pandemic.

Air passenger traffic has plunged 90% compared to last year. This took place as the shelter-in-place orders and work-from-home directives have sapped the demand for air travel.

Recovery Projections

Dave Calhoun, Boeing’s CEO, says he expects it could take 3 years to see demand recover to pre-coronavirus levels. He also says the company needs two more years to get the industry back on the growth track it was on before the lockdowns took effect.

Last week, he appeared on Fox Business’ “Mornings with Maria” and said he expects air travel to only rebound to 50% by the end of the year.

“If I survey all of our customers and I start here in the U.S., and of course we do … most are trying to dial in a return of about 30 [percent] to 50 percent by the end of this year,” adding, “A lot’s going to depend on how the public responds to the safety of airline cabins, etc.”

During an appearance on the “Today Show” yesterday, Calhoun even went as far as predicting that a major US airline will go out of business before Halloween.

“I don’t want to get too predictive on that subject. But yes, most likely,” Calhoun said. “Something will happen when September comes around,” he added. (When asked for a comment, a Boeing spokesman said Calhoun “was speaking in general about the uncertainty in the sector not about any one particular airline.”)

Possible Outcomes

September is when the payroll support program under the CARES Act ends. This program set aside $25 billion in grants and loans for U.S. airlines. Roughly 90 percent of the allocated money is expected to go to the US’s five largest airlines – American, United, Delta, JetBlue, and Southwest.

Calhoun believes that airline passenger levels will still only “be back to 25 percent” by September. He said, “There will definitely be adjustments that have to be made on the part of the airline.”

It appears most airline analysts are a little more upbeat about the industry’s prospects for recovery than Calhoun. Helane Becker, an analyst at Cowen, said the 52% of respondents to the firm’s survey expect a U-shaped recovery for the industry. Becker is also just 12% expecting a recovery in more than 4 years.

Shares of the major airlines dropped after Calhoun’s comments. It happened as American Airlines Group Inc. fell by 4.46%, Delta Air Lines declined 4.41%, United Airlines fell 5.05%, and Southwest Airlines fell 3.3%. JetBlue Airways losing 5.84% and Spirit Airlines dropping by 7.36% also added to the cause.

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Oil Headed to $100? This Billionaire Says Yes

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Oil Headed to $100? This Billionaire Says Yes

At least one billionaire investor says he’d be buying shares in airlines right now. This happened only days after Warren Buffett had announced that Berkshire Hathaway has sold all of its airline stocks.

Perhaps unbelievably, the billionaire also sees an opportunity in tourism and hotels and says oil will head much higher.

Naguib Sawaris, chairman and CEO of Orascom Investment Holding and the only non-North Korean to hold a telecom license in North Korea, said during a recent appearance on CNBC that he sees plenty of opportunities right now.

“With every crisis there is opportunity,” Sawiris said. “You can go and buy an airline today for $1 if you are assuming the bulk of the debt.”

Most US-based airline stocks are down 50% this year, and air travel has plunged more than 95%. This took place as the coronavirus pandemic has brought the travel and tourism industry to a grinding halt.

Hope exists that as the country starts reopening and eases restrictions, the travel and tourism industry can start to recover.

Sawaris says that President Trump’s decision to reopen the country is “one of the few times” he has been right. He also said that there is too much uncertainty around the possibility of a potential cure for the country to remain locked down.

“They might not find the cure, they might not find the vaccine, so how long are we going to be in prison in our homes?”

$100 Oil in 18 Months

Sawaris says that the recent price war between Saudi Arabia and Russia was a “calculated” move not against each other. However, he also believes this move serves as a coordinated effort to cripple the shale industry here in the United States.

He also believes that even if the OPEC+ nations, which includes both Saudi Arabia and Russia, had reached an agreement in March to cut production, both countries knew that oil prices were still going to fall as demand plunged across the globe due to the coronavirus. He said a deal in March would have meant lower oil prices. However, he pointed out that “it would have not fallen to this level.”

There are expectations that prices were going to continue falling. With this, both countries ramped up production when the existing agreement ended on April 1. There’s no other reason for this than to try and drive American shale companies out of business.

“I think it was calculated,” he said. “I think they knew that this was going to happen and they still wanted to do it because, by killing a competitor, the price will rise beyond 50 or 60 dollars.”

Sawaris went on to say that he expects oil prices to head much higher.

“I actually believe that 18 months from now oil will hit $100,” he said.

However, as John Browne, former CEO of British Petroleum points out, oil prices could stay low for a lot longer.

“The prices will be very low and I think they will remain low and very volatile for some considerable time,” Browne told the BBC in a recent interview.

“This is very reminiscent of a time in the mid-1980s when exactly the same situation happened – too much supply, too little demand and prices of oil stayed low for 17 years.”

Editor’s Note: What’s your take? Will oil prices push towards $100/barrel in the next 18 months? Or is cheap oil here to stay? Leave us your thoughts below.

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