Inside One Major Airline's 'COVID Pivot'

A quiet international airport... The airline industry is looking for another bailout... Inside one major airline's 'COVID pivot'... This doesn't mean you should buy shares... Don't miss Tom Carroll's cannabis event tonight...

'It's my first time flying!' the pilot said...

The jovial, gray-haired man in a uniform, wearing a black mask, walked past passengers on the jetway ramp yesterday... I (Corey McLaughlin) was boarding a Southwest Airlines (LUV) flight from Florida to Baltimore.

He was clearly a veteran pilot... and had a welcomed sense of humor. A close listener could overhear him on the cockpit radio as we pulled back from the gate, wondering aloud, "What else am I supposed to say?"

He mentioned masks. "That's a federal law now." And he also pointed out the six emergency exits that this "dirty bird" had.

It felt almost normal again... Anyone who has flown Southwest before knows that humor among the staff is part of the charm (and that some of the jokes land better than others).

What's more, this was a "totally full flight," as one of the attendants told us. And after heading to Baltimore, it would be going on to Chicago and then back south to Orlando.

The masks on everyone's faces and the notices about the HEPA ("high-efficiency particulate air") filters rotating fresh air through the plane's cabin every two to three minutes were about the only visible differences from flying a year ago...

Moreover, the airport in Fort Myers wasn't as full as we've seen in recent years... But it also wasn't as empty as I expected either. (And that's not a one-off trend in Florida, as it turns out.)

The same couldn't be said when we got off the plane in Maryland...

Entering Baltimore-Washington International ("BWI") Thurgood Marshall Airport off an arriving flight is usually like walking into a packed mall during Christmastime... or, at least, what that used to be like.

Loud. Crowded. Bustling with energy. People going places.

Picture the scene in the movie Home Alone when the rest of the family leaves behind Kevin, played by Macaulay Culkin, at Chicago's O'Hare International Airport.

But yesterday, when we stepped off the flight in Baltimore – one of Southwest Airlines' major hubs – it instead felt like walking into a doctor's office waiting room. It was so quiet that I was worried about someone overhearing my conversation with my wife.

And I overheard our captain talking with a pilot who was taking over the plane for the next trip. "It's a good bird," our pilot told him during the exchange of the proverbial keys.

"Are you going somewhere else?" the younger captain said.

"No, three days is long enough," our pilot said, and he laughed... And with that, they split.

I could only assume our pilot meant he had been working for three days straight, with whatever breaks the Federal Aviation Administration ("FAA") requires... hopefully, at least.

In any case, our pilot's comment – and the fact that I could eavesdrop on it from several feet away – got me thinking about Southwest's operations today... and the latest about the state of the airline industry in general.

We've covered the industry periodically here in the Digest over the past year, noting that it would be one of the biggest to suffer during the COVID-19 pandemic and one of the last to recover.

That has proven true...

A relatively quiet BWI airport says as much about the state of the industry as my full flight did...

The flight wasn't full because everyone is trying to fly today. It was full simply because fewer are available.

Many people are still reluctant to travel in a tight space with strangers for a few hours...

This is despite rare reports of airline-related COVID-19 outbreaks, and despite planes' HEPA filtration that's better than what you would get in an operating room or isolation room on the ground, according to a Department of Defense ("DoD") study.

The bigger risk to consider is possibly picking up COVID-19 in the airport and giving it to family or friends upon gathering. In any case, in 2020, U.S. passenger air traffic fell to 368 million... its lowest number since 1984.

And the airlines' business model is tied to full airplanes, which means operators have cut thousands of flights due to lack of demand.

Our colleague Dan Ferris described this part of the airline business in an October 2019 Digest, where he mentioned an inventive idea by economist Julian Simon...

Airlines don't like planes with empty seats. They want to sell out every flight. But to do that, they wind up selling more tickets than available seats on the plane. It created headaches... until Simon suggested offering passengers an incentive to take a later flight.

If you've ever been sitting in an airport waiting area and heard an airline representative announce they're giving away "$300 in air travel" or a similar incentive to anyone willing to give up their seat and take a later flight, you know what I'm talking about.

Vouchers to take the next flight? Those were the good ol' days. Yesterday, I saw only two departures to Baltimore for the entire day from a major Florida airport.

With fewer people still flying today because of the pandemic, the number of flights per day is still about a third less than before January 2020, which is when we started writing about the new "Wuhan virus" in the Digest.

As you can see in the chart below, this past February, there were about 70,000 commercial flights worldwide per day, compared with roughly 110,000 per day in January 2020...

"The year has been very tough for us," another Southwest captain said on my flight down to Florida, which was about two-thirds full. "We appreciate your business."

The same can be said for the entire industry... You don't just lose about two-thirds of your business in a little more than a month, as happened last March, without consequences.

Roughly 30 commercial airlines went bankrupt or ceased operations in 2020 – including South African Airways, one of the largest carriers in Africa. And many more would have gone bankrupt without government support.

In the U.S., the number of airline employees dropped by roughly 90,000 in 2020, to its lowest level since the 1980s. More than 30,000 workers have been furloughed from major carriers like United Airlines (UAL) and American Airlines (AAL).

Thousands of former employees have accepted buyouts, as big airlines sought to not lay off employees before the end of September 2020 as part of the conditions of the industry's first bailout agreement with the government in April 2020.

Last summer, Southwest offered employees its self-described "most generous" buyout packages to avoid layoffs for the first time in the Texas-based company's history. As the Dallas Morning News reported last June...

Most Southwest employees with more than 10 years at the company would get a year's pay and four years of flight privileges if they opt for early retirement. Pilots would get paid about two-thirds of their average salary for five years or until they hit 65, whichever comes first. Early retirees would also get a year of company-paid health insurance.

Today, the airline industry is looking for another bailout...

As Stansberry NewsWire analyst Nick Koziol reported on Tuesday...

According to testimony seen by Reuters, industry group Airlines for America... reportedly will tell Congress that airlines need more government assistance, or else companies will be forced to lay off tens of thousands of workers.

The stimulus bill, which was just passed by the House of Representatives, includes $18 billion for airlines to keep employees in their jobs for another six months.

The airline group – which represents American Airlines (AAL), Delta Air Lines (DAL), and United Airlines (UAL), among others – will say that airlines continue to burn through $150 million in cash per day, according to Reuters.

As our colleague Bill McGilton wrote in January's issue of Stansberry's Big Trade, Delta, for instance, expects to continue to lose between $300 million and $450 million per month this quarter.

Bill also noted that Delta's sales fell 69% year over year in the fourth quarter of 2020... and the airline industry just got another $3 billion in stimulus from the U.S. Treasury to support payrolls. As Bill said...

The airline industry is nowhere close to normal. The passengers that make Delta the most profit – business travelers – continue to work from home. And a more contagious strain of COVID-19 threatens to further pressure the industry.

Yesterday, American Express (AXP), which relies heavily on travel and entertainment (T&E) spending for purchases across its cards, said that spending on airlines was down 85% and spending on cruises was down 98% during the fourth quarter [year over year]. So far, T&E is showing scant signs of a comeback.

Bill's comment about business travelers continuing to work from home is a significant observation that touches pretty much the entire economy. It's a topic of discussion among many business leaders today...

What will the mix of in-person and remote working or learning look like even once the pandemic is over? (Let us know your thoughts at feedback@stansberryresearch.com.)

A personal opinion... The future includes probably more remote work – and sooner – than anyone previously imagined. With business travel declining, commercial airlines might not ever get back to the capacity they had before... or at least not with the same routes or business plans that they had before the pandemic.

Southwest has already changed its strategy to make money...

My sense about seeing more people than I expected in the Fort Myers airport was not a mirage.

Southwest, in a search for passengers to fill seats, has smartly pivoted and is actually adding new routes to outdoor-friendly destinations where social distancing was already a significant way of life before the global outbreak of COVID-19.

With its beaches, golf courses, and typically warm weather, Florida fits the bill...

For instance, it was the warmest place in the country a few weeks ago, when the rest of the U.S. was freezing. From a recent report on travel website The Points Guy...

Southwest is... making significant boosts across its entire domestic network, with a focus on Florida flying.

Atlanta will see additional Sunshine State connections. The carrier has extended service to Panama City (ECP) and Pensacola (PNS) through Aug. 16. Previously, both routes were slated to wrap up in mid-April.

Pensacola is also getting a Southwest route from Baltimore (BWI). The BWI-PNS flight last flew in 2020, but it's now on the books to restart with a once-weekly Saturday service between April 17 and Aug. 14.

Another Florida city – Fort Myers – will see its 16th Southwest route this summer. The carrier just extended the schedule for its Houston/Hobby (HOU) to [Fort Myers] flight through Aug. 16.

In November 2020, Southwest revealed it would add a new pin to its route map: Sarasota/Bradenton (SRQ). Flights began last month, and there seems to be strong enough demand to warrant additional flying.

Southwest has also started service to Bozeman, Montana – a gateway to Yellowstone National Park. The airline usually adds one or two new destinations a year, but so far in 2021, it has added at least 10.

As Southwest Executive Vice President Andrew Watterson said in a press release...

We're adding another destination in the West, our first in Montana, and bringing additional access to the beaches of Northwest Florida just as winter-weary families begin to dream of warm summer escapes in wide-open places.

The airline is also currently offering some one-way fares as low as $29.

The point is, it's still doing everything it can to lure passengers onto planes...

As we've said before, in the U.S. alone, 70% of the economy is tied to consumer spending... It's an idea that too often goes unsaid in the economy and markets. "We the people," have more power than we might think.

The airline industry is just one example...

Now, anecdotally, you might be hearing stories about people getting on airlines again. And the forward-thinking market has certainly bid up shares of airline stocks over the past few months.

Our colleague Ben Morris of DailyWealth Trader also took a Southwest flight this year. He wrote about it in the February 5 issue. As Ben said...

If you're like us and a lot of folks we know, Southwest is your airline of choice. Reasonable prices, free checked and carry-on bags, and the ability to change your ticket without a fee won us over. If Southwest flies the route we need to fly, it's an easy choice.

Given the tailwinds, Ben and his co-editor Drew McConnell recommended a short-term trade in Southwest, selling put options for income, essentially betting on higher prices over the next six weeks... And, making their point, it was hard for some subscribers to get into the position because the airline's share price rose so quickly.

LUV shares are up 45% since the start of November – to around $56. In other words, before a 3% drop today, shares were at almost the exact price they were in February 2020.

Now, you could debate the scope of Southwest's move higher...

And we'll bring up two points to consider on this front...

One, the market is looking into the future... believing that the airline business will rebound if or when COVID-19 cases and hospitalizations decrease. As Ben and Drew said of Southwest...

The main point is that sales are recovering as things start to go back to normal. Last quarter, the company generated $2 billion in sales. That's up 12% from the prior quarter and 100% from the second quarter of last year. We expect the numbers to slowly continue higher from here.

And two, as we detailed on Tuesday, we're living in market times when stocks are more expensive than they've been in 98% of S&P 500 history. Many moves higher might be bigger than many investors expect.

That's the case here... Sure, our one flight was full, but there are thousands fewer flights in the sky than were there a year ago. Plus, the major airlines are still asking for huge amounts of financial assistance to simply survive and not lay off more employees.

Southwest reported a net loss of $908 million in the fourth quarter of 2020... Its shares trade at a negative 20 price-to-earnings ratio today... And the company said bookings for January and February 2021 had stalled given rises in COVID-19 cases at the end of 2020.

And as Nick from our NewsWire team also reported last week, the airline industry's rebound might be slower than expected...

It's clear that 2021 is going to be worse than previously anticipated for airlines...

That was the message from the International Air Travel Association ("IATA") in a press release this morning. Citing new COVID-19 travel restrictions, the IATA said that future bookings for the summer are down 78% below those from February 2019. As a result, the industry group raised its cash burn outlook for airlines...

Nick also wrote that the IATA – a trade group – doesn't expect airlines to turn cash flow positive until 2022 (versus the previous expectation of that happening during the fourth quarter of 2021)...

Under the industry group's optimistic scenario, 2021's global airline demand would come out to about 38% of 2019 levels. In this case, the industry would burn through $75 billion in cash – $33 billion in the first quarter trimming to a $7 billion cash burn in the final quarter.

In a pessimistic scenario, 2021 demand would be 33% of 2019 levels. The industry would burn through $95 billion over the course of the year – with $33 billion in the first quarter narrowing to a $16 billion cash burn in the fourth quarter.

So, in sum, the airline industry is far from out of the woods yet – despite the share prices of many major airlines reaching pre-pandemic numbers. Think long and hard before you buy these stocks today... And most important, if you're going to trade the airlines, make sure you are doing it for the right reasons and at the right prices.

When Ben and Drew recommended selling puts on shares of LUV, they were making a short-term bet on higher prices over a six-week period. They were selling puts for income, believing that LUV prices would go higher and not lower, in contrast to the bearish investors they sold their contracts to.

That trade has proven to be a smart move. Still, the longer-term picture and current valuation for Southwest and other major airlines remain more questionable today.

As NewsWire editor C. Scott Garliss likes to say, professional money managers look out six months into the market when making buy or sell decisions. By that logic, Southwest's share price today indicates business will be back at pre-pandemic levels by September.

Do you agree?

Switching gears to another industry we've been tracking in the Digest...

Our colleague Thomas Carroll, a longtime health care analyst and our Cannabis Capitalist editor, has been all over the emerging "green wave" during the past several months.

We're talking about the many real developments happening in the cannabis industry.

A variety of factors have created the perfect environment for a massive boom in the industry. From more states legalizing cannabis use to major legislation sitting in Congress right now, a lot is happening...

This is why we said a few weeks ago, if you left the cannabis industry for dead after its bubble in 2018 and 2019, it's worth a second look today. The industry is maturing quickly... and a lot more money could be flowing into it soon. As we wrote in the February 4 Digest...

We see an innovation and acceptance cycle happening here, just like we've seen with bitcoin... or any other number of emerging industries throughout our history.

And the increasingly positive sentiment is being reflected in stock prices...

Here's a chart of the North American Marijuana Index, which tracks a basket of 41 U.S. and Canadian stocks. Notice that the trend was down heading into the March 2020 stock-market bottom. But recently, it has headed to highs last seen in 2019...

If you want to learn more, there is no single better person to follow for advice in cannabis investments than Tom. His Cannabis Capitalist model portfolio currently features six triple-digit winners – ranging from 104% to an amazing 427%.

And even better, he believes the biggest upside is still ahead for this burgeoning industry...

Tonight, in a special event with Empire Financial Research founder Whitney Tilson, Tom will share all the details about his absolute favorite four cannabis companies. He believes these stocks could soar hundreds of percent or more in the years ahead.

Plus, Tom will give away his favorite cannabis stock to everyone who tunes in. The event is 100% free... And it starts promptly at 8 p.m. Eastern time. We just ask that you sign up in advance to make sure you don't miss a minute. Reserve your free spot right now.

New 52-week highs (as of 3/3/21): American Express (AXP), Berkshire Hathaway (BRK-B), Enstar (ESGR), Comfort Systems USA (FIX), Manchester United (MANU), Altria (MO), MasTec (MTZ), Seagate Technology (STX), and W.R. Berkley (WRB).

In today's mailbag, an "art imitates life" story about the U.S. economy. Do you have a comment or question? As always, send them to feedback@stansberryresearch.com.

"Good feedback on inflation [in Tuesday's Digest], only understood by very few. Certainly not the general public. Loved 'makes astrology respectable.'

"A possible conversation with one of the general public:

"Why doesn't our government just pay everything with the excess revenues they collect? They do not have excess revenues, they spent it all and borrowed more.

"Why doesn't the government collect enough revenues? A better question. For two reasons. One: They do not collect enough to have an excess. Why? Tax breaks. Two: They always spend more than they collect. Why? Because they can.

"How do they do that? They borrow by selling Treasury notes that expire and pay interest.

"How does our government pay the interest on the Treasuries and the principle back? They do not. You do.

"How do I do that? Taxes.

"But you said they do not collect enough revenues. Yes.

"So how do they do that then? They borrow more by selling Treasury notes that pay interest.

"Wait, how can we keep borrowing without paying it back? We can't, but we can get away with it as long as no one complains.

"How bad is it now? We can never pay the national debt off.

"Can we at least pay each year's debt off? Nope, no chance.

"Is this a Democrat or a Republican thing? Nope, the guilt is spread evenly between them. Neither really cares about debt.

"What happens if we keep doing this too long? Don't you have something else to do?

"Our credit fails and we default on our debt.

"Has that ever happened before? Yes.

"Why don't we just devalue our currency and pay it back that way?

"Are you interviewing for a job in government? Who told you about that?

"[Internal] comment: Better keep that quiet, we do not want anyone stuck on stupid to get wind of this.

"Please do not concern yourself about the accelerated ongoing government counterfeiting of your currency, destroying its value by dilution.

"Keep up the good work. And no more questions.

"Repeat from top." – Paid-up subscriber Bernie B.

All the best,

Corey McLaughlin
Baltimore, Maryland
March 4, 2021