A Trip on Uncle Sam Airlines

A trip on Uncle Sam Airlines... The government cuts a deal with the airline industry... A Mike Tyson punch and a Babe Ruth swing... United cuts flights by 90%... The science is against them... Invest like Howard Marks – in distressed bonds...

Attention, ladies and gentlemen, a few reminders before we take off...

Once again, this is American Airlines Flight 2020 with service from Washington, D.C. to... somewhere close to where you need to go.

We're even more American now. Oh? You've heard that one before. Apologies...

For those who haven't heard – maybe you turned off the news for your own benefit – Uncle Sam is paying our salaries now... and probably will be for a while...

And if you hadn't noticed on your bill, management is taking even more taxes out from what we've charged you for that boarding pass...

But, hey, at least you can still fly where you want to go... although not nearly as often and as cheaply as you would have wanted.

Please take a moment to note the safety features of our aircraft...

Two rear exits. Two over the wings. And two up front. We also have two bathrooms, one in front and one in back.

Please remain in your seat until the captain turns off the seatbelt sign... and if, or when, he does, please do not congregate near the front bathroom for security reasons...

You are still free to move about the cabin... but please keep your masks on. (These are different from the oxygen masks, of course.)

Once again, thank you for choosing Uncle Sam – I mean, American – Airlines...

While we embellish a little bit with this fictional scene... it's not by very much.

You and I, dear taxpayer, whether you've bought shares of 10 major airline companies – like American Airlines (AAL), Southwest Airlines (LUV), United Airlines (UAL), and Delta Air Lines (DAL) – already or not, will soon (sort of) have a bigger stake in them...

The U.S. Treasury Department announced a $25 billion agreement on Tuesday, with 70% of the money that's going to each company arriving in the form of a "grant" that doesn't need to be paid back under a few conditions.

The deal is meant to ensure airline workers have jobs. The airlines cannot lay off employees before September 30 or change collective bargaining agreements and must agree to restrictions on buybacks, executive compensation, and dividends.

And this is where the Uncle Sam Airlines idea becomes a reality... The government also has the option of taking about 1% stakes in the companies via millions of warrants. Here are more details from news service Reuters...

Under the terms laid out by Treasury officials last week, the government would receive repayment on 30% of the funds awarded to large carriers and warrants equal to 10% of the loan amount that were priced at last week's close.

Delta said it will receive $5.4 billion in grants, of which $1.6 billion will be an unsecured 10-year low-interest loan that has to be repaid, and will provide the government with warrants to acquire about 1% of Delta stock at $24.39 per share over five years.

American Airlines said it would receive $5.8 billion in grants, of which it would need to repay $1.7 billion.

Southwest said it had agreed in principle and expects to receive $3.2 billion in grants and will have to repay nearly $1 billion over 10 years. Southwest will issue 2.6 million warrants to the Treasury...

JetBlue Airways (JBLU), Alaska Air (ALK), and Spirit Airlines (SAVE) are getting help, too.

Grants, schmants... Call it whatever you want... It's a bailout...

Now, we're not saying the airlines don't need help and that we want people to lose jobs. But it might be difficult to feel empathy for these companies when it comes to balance sheets.

As we wrote back in the March 21 Digest, when we first talked about the idea of an airline industry bailout...

It's crazy in a way... The major airlines have spent the past decade buying back billions of dollars of stock to boost their share prices. In fact, they've used 96% of their free cash flow ("FCF") over the past 10 years to do so... and now, they're asking Uncle Sam for cash.

American Airlines, for instance, spent $13 billion on stock buybacks over the past decade.

Our Stansberry Research editors are huge fans of FCF. But they're also fans of quality businesses that smartly reinvest that cash and grow their businesses... and don't spend it almost exclusively on stock buybacks.

Now, the airlines won't be able to do buybacks until September 2021.

A Mike Tyson uppercut to the jaw followed by Babe Ruth taking a bat to your groin...

That's the equivalent of the blows the airline industry has taken this year.

No U.S. industry – other than cruise ships maybe, given how the coronavirus traveled around those floating petri dishes in February and March – has been a more obvious symbol of the economic fallout from the COVID-19 pandemic.

The impact started in February, when long-haul flights to and from China were abruptly scrapped. As the virus spread around the world and to our shores, so did the massive cancellations of flights, given the unknown nature of the disease and stay-at-home orders.

Take a look at this chart, passed along by Stansberry Venture Technology editor Dave Lashmet. It shows the number of flights this year, measured in total flights per day, compared to the number that have flown the past five years, according to tracking data...

(Click the image to enlarge it.)

You can find any number of statistics to illustrate the dire situation the airline industry is in today...

For one, our Stansberry NewsWire team reported this week that the coronavirus is going to cost the airlines $314 billion.

For another, Warren Buffett and Charlie Munger's Berkshire Hathaway (BRK-B) recently sold nearly 13 million shares of Delta and 2.3 million shares of Southwest Airlines, for total proceeds of $388 million, according to U.S. Securities and Exchange Commission ("SEC") filings.

(Related, we've seen a few stories that there's an argument to be made that part of the reason they sold was to get under an SEC reporting regulation for those who own more than 10% of a company. But if that's the case, Berkshire could have sold far fewer Delta shares.)

In brief, demand for flights has plummeted – traffic is down 95% – in an industry that relies on filling every seat. With that in mind...

United is cutting flights by 90% for the next two months...

Even with the government assistance, the airlines are cutting costs in a huge way. United CEO Oscar Munoz and President J. Scott Kirby told the company's 100,000 employees in a letter yesterday...

This weekend, we'll load a revamped schedule that will further reduce our capacity to about 10 percent of what had been planned for May at the beginning of this year. We expect to announce similar reductions to the June schedule in the next few weeks.

We have now essentially redesigned our network to be down 90 percent while complying with the CARES Act and maintaining connectivity among nearly all our domestic destinations.

And these May and June schedule reductions will have direct consequences for our frontline employees in terms of total hours worked. Those work groups can expect to hear more details from their leaders soon.

Whatever America's 're-opening' looks like, don't expect a return to business as usual at all for the airlines...

Back to Dave Lashmet... He sent us a pair of private e-mails this week, noting an article that said airline revenue is three times worse than the worst-case scenario five weeks ago.

Sure, this is because of rock-bottom demand, but it's based off legitimate fear from what we now know about the science of COVID-19.

That has been illustrated by some state governments and the U.S. Centers for Disease Control and Prevention telling us all to wear masks in public, as opposed to the free-breathing guidance at the beginning of all this. As Dave said in one of his e-mails to us...

It's because it's airborne now. Well, it always was, but everyone was just hopping over that problem. The fact that the virus is airborne is going to kill the airlines, whose economics are to fill every seat. That means you share air with everyone.

That the air flows all the way to the back of the plane and then is filtered helps no one. Flying without an N-95 or higher mask on simply assures, you get every aerosolized virus that every other passenger breathes.

Regardless, filling every seat in an enclosed jet exacerbates that problem. So fewer fuller flights is just an industry death spiral. From the industry that invented death spirals.

The Tyson punch was the virus itself... and the Great Bambino's swing is the fact that an airplane full of passengers is the last thing that's going to stop the spread of an invisible, highly contagious, mutating, airborne disease.

Then, throw in the triple-whammy of this realization...

This is maybe a Pelé kick...

For the next year, say... or at least until we have a reliable, scalable way of knowing who and who doesn't have the disease... why would anybody, much less a company that could get sued for negligence or is facing its own cost issues, send an employee on a flight for a meeting or conference unless it was absolutely necessary?

Why would you or I get on a plane unless it was critical? For instance, something like a family member in distress or close to dying.

In most other cases, people could just hop on a video conference instead... That would cost less money and is healthier in the short term.

Of course, staying holed up in our houses is no way to live a rich, human, and free life in the long term. But all signs point to us needing to get used to a new way of life, like flying the friendly skies on Uncle Sam Airlines, if you so choose.

Finally, on Tuesday, you may remember we talked about 'smart investors'...

We brought up the idea in the context of our colleagues Mike DiBiase and Bill McGilton, who have been all over the coming corporate credit crisis that has arrived in earnest...

Mike and Bill write our Stansberry's Credit Opportunities newsletter. It focuses on finding potentially lucrative investments in a little-known and hardly understood section of the markets... corporate bonds.

These are debt vehicles for companies that are available for the public to invest in – and perfect for the distressed environment we're in today – but many investors aren't aware of the opportunities. As we said in Tuesday's Digest...

It's a strategy that some of the world's greatest investors – like Warren Buffett, Paul Singer, and Wilbur Ross – use when they're looking to deploy cash during crisis times like today.

We should have included Howard Marks, one of the most famous debt investors in the world. You've likely seen his name before. Our colleague Dan Ferris frequently mentions or quotes Marks' wisdom.

I, too, subscribe to his newsletter, which he has been writing at a greater frequency over the last month. It's a treat for investors of all kinds.

Marks' Oaktree Capital is reportedly raising $15 billion for a distressed-asset fund...

Stansberry NewsWire editor C. Scott Garliss included this today in his daily "Things I Read While Scanning the Markets," which is always a nice, brief rundown of the day's top stories each morning.

Marks touched on the distressed-debt space in his latest note, sent on Tuesday. He was spectacularly articulate and insightful about the Federal Reserve's massive intervention in the credit markets...

Most of us believe in the free-market system as the best allocator of resources. Now it seems the government is happy to step in and take the place of private actors. We have a buyer and lender of last resort, cushioning pain but taking over the role of the free market.

There's an old saying – variously attributed – to the effect that "capitalism without bankruptcy is like Catholicism without hell." It appeals to me strongly. Markets work best when participants have a healthy fear of loss. It shouldn't be the role of the Fed or the government to eradicate it.

What's the Fed's purpose in buying non-investment grade debt? Does it want to make sure all companies are able to borrow, regardless of their fundamentals?

Marks, though, apparently sees opportunity in the distressed-debt space, just like Mike and Bill do. The last time Oaktree raised this much capital for a distressed-asset fund was in 2008, during the last financial crisis.

These are exactly the types of investments that Mike and Bill and our founder Porter Stansberry have been talking about for years in Stansberry's Credit Opportunities. Mike and Bill recommended seven new trades at the end of March... and another one just yesterday.

You owe it to yourself to at least hear what they – and one subscriber who retired at age 52, thanks in part to their guidance – have to say now about these opportunities and the world of corporate debt.

The best investors like Marks are looking into it right now... And you can, too. Right now, you can get access to this research at the lowest price we've ever offered. Click here now for all the details.

New 52-week highs (as of 4/15/20): Amazon (AMZN), DocuSign (DOCU), Electronic Arts (EA), Barrick Gold (GOLD), and NovaGold Resources (NG).

In today's mailbag, a note about the Federal Reserve in response to Tuesday's Digest... Do you have a question or comment? As always, send it to feedback@stansberryresearch.com.

"'How many kitchen sinks does the Fed have left?' I've been asking that question since the early 70s, when everyone thought the financial world was surely coming to the end. I still don't have an answer.

"I do know that this 'easing' can't go on forever, but I now believe I'll be long in my grave before anything substantive happens. Just sayin'." – Paid-up subscriber Marty M.

All the best,

Corey McLaughlin
Grounded in Baltimore, Maryland
April 16, 2020