Airlines prepare for Q1 2020 earnings release
Today is May 4th, 2020. The world has been in Lockdown since mid-March and many individuals and organizations are eager to get back out in the world and begin operations as normal again. Although many fear that normal may take years to return back to, studies show that normal may never be what it once was before.
The International Air Transport Association (IATA) published a press release back on March 17th (COVID-19 Airlines Liquidity Crisis) which explained the impact that will occur to the global economy when aviation is brought to a screeching halt. The areas which greater populations are those which are experiencing the greatest number of cases are also the cities which have the strictest travel restrictions. Considering the viral behavior of the virus one can create a correlation to those highly dense cities to being more prone to having a greater spread of cases.
IATA mentioned the frailness of the airline industry prior to COVID-19. With many airlines running with just enough cash to maintain operational for a few weeks every penny is taken into account for. The airlines operate routes that will provide greater load factors for their aircraft which in result provides greater returns for the high costs associated with operating a commercial fleet.
The typical airline has on average about 2 months of cash in reserves to maintain operational with levels of travel as low as we are seeing them now. The first month was the initial crisis and scare where we instantly say the market begin to price in worse case scenario. As the optimism started to rise and the World Banks began to pump money into the economy in forms of grants and loans. As we start to enter the second month of our quarantine we are all looking closely at the earnings reports for first quarter.
Now when the earnings reports come out all investors can expect the numbers to be low in comparison to the peak operational days we say back near the end of 2019. What is going to be a key determining piece in these earning reports will be to look for what companies are saying for the projected weeks ahead. The response and course of action for the coming weeks will be the greatest sign of where the market will be headed as a whole.
Regardless of course nobody can determine what will be the outcome or time span of how long we will need to endure these global conditions. So it is important that companies focus on how to remain present and functional while also bringing in new innovative ways of creating revenue. Few airlines in the pacific region have enough cash in their balance sheets to hold them sustainable for up to around 9 months. As well as in the Middle east many airlines have shown to be able to remain operations.
Airlines in Africa, Latin America and North America have the greatest risk or needing additional financing or strategic adjustment to remain operational as their range for how many months they can remain open for is between 0 months and 4 months. This creates a tough situations for the next summer quarter.
Although travel tends to go up in the summer many families around the world may still not be ready to travel by air. They may elect to travel via car should they decide to leave home. While many have said that they would rather sit this one out in the comfort of their own home.
Volatility Rises in first week of May
When we look at the Volatility of the S&P 500 Index we are able to get a current understanding of the condition of the market. Volatile market can often create fear in investors and turn them away as they become crippled by indecision. As we trade in markets where the volatility index (VIX) is high our strategies may need to be changed as there is a greater probability of there being greater and more sudden changes in the market.
When we look at the VIX over time its important to understand what it is reflecting and how to best understand its trends. When the VIX is low it is referring to the average of where the VIX is currently and where it was before. When we look at the end of 2019 we see how the VIX trades in a range between 10-15 on a standard trading day depending on the current global event.
Near the middle of March as countries around the world experienced some of the strictest quarantines protocols and confirmed cases rose exponentially we see how the VIX reaches a high up near 85 for that day. Since then there has been some gain of optimism and confidence as the VIX lowers and stock begin to enter their V-shaped rally.
As the market open up on the 4th of May we start to see an uptick in the VIX which pulls down stocks in the Pre-Market Trading. Although the VIX is moving down in a downtrend from its recent high of 85, having the VIX sit at just under 40 is still something significant to take into consideration.
When we are in basic trading conditions and the VIX is up at 40, many investors would certainly be trading differently and be potentially looking to short positions or purchase puts. Yet in today market conditions while the VIX is still up near 40 we are hearing the market proudly buying long positions. This would traditionally be contrary to what would be done when the VIX is up at 40.
Have we entered a stage of the market where these high levels of volatility have become part of the “norm”?
Aviation companies Scheduled to release earnings May 4th – 8th
|Company & Ticker||Last Price 5/4 09:00 EST|
|Atlas Air (AAWW)||31.95|
|XPO Logistics (XPO)||64.33|
|Gol Airlines (GOL)||4.27|
|Air Transport Services (ATSG)||20.22|
|Expeditors Washington (EXPD)||71.36|
|Hawaiian Airlines (HA)||12.97|
|Alaska Air (ALK)||30.11|
|Virgin Galactic Holding (SPCE)||17.92|
|Copa Airlines (CPA)||42.60|
|Spirit Airlines (SAVE)||13.17|
|Mesa Air (MESA)||4.15|
|Air Lease (AL)||24.20|
|Latam Airlines (LTM)||3.37|
|AerCap Holding (AER)||26.59|
|Spirit Aerosystems (SPR)||20.47|
“Sell in May and go away”
The seasons of the market are as true as the season on our Earth. We have seen time and time again these seasons repeat themselves year after year. Reason being is that the market is a man made entity which follows human behavior. In a regularly scheduled year at the end of May school is out. Families tend to go on vacation and the corporate world slows down a bit as more focus is put on taking care of the children that are now at home for the next two months.
The question I ask is will we see the same happen this year to follow tradition of the years before. Considering families are already at home with their children forcefully and schools are closed for the remainder of the academic school year. Will we see another sell off for the month of May after such a brutal and sudden drop in market value in the last few weeks.
Although some stocks will flourish during the summer many may remain stagnant with almost little to no sudden movements as trading volume may decrease significantly. Regardless with the internet creating an even playing field of information being spread through the world any sudden news or changes in our global situation could quickly cause alterations to the current conditions which we have anticipated.
Looking to determine what play large institutions will play will be a key player also in determining how to play the coming months as we enter the summer season of the year. If we start to see more companies reduce some positions then we can continue to see more selling. Although we have just gone through one of the fastest bearish swings that has ever occurred in the market we can still expect for tradition to follow and for there to be some selling that continues to occur through the month of May. While on the other side with prices having dropped so much for certain companies going long may be an option that provides a higher probabilty of success. Only time will tell as we watch to see another week ahead in the aerospace industry.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options: https://www.theocc.com/components/docs/riskstoc.pdf
Air Market Group content is provided solely by Air Market Group LLC and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. Air Market Group, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. Air Market Group is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. Multi-leg option strategies incur higher transaction costs as they involve multiple commission charges. Air Market Group is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
These articles are posted and shared free of charge thanks to the support of donations and sponsors. Please make sure to subscribe below to our email list to get the latest updates in the market. All ideas and opinions of this blog are prepared by the author to provide you with information and they may be subject to error.
Donations from readers like you help keep this blog running. We appreciate your support!