The S&P 500 airline index was once down over 65% on the year. It is currently down roughly 50%.

Is it time to buy?  Is it time to try to “catch a falling knife?”

Let’s start with the backdrop. U.S. airlines went into slowdown carry a high amount of debt. The table below shows the credit ratings on U.S. airlines. The only investment grade airline is Southwest; the rest are deep into junk status.

The Credit Ratings on U.S. Airlines

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The Credit Ratings on U.S. Airlines

Airlines face a challenging future, as evidenced by the chart below. The chart shows the times series of the number of U.S. departures for both domestic and international flights.  The number of flights per day collapsed, and has recovered a bit, but is still far, far below pre-virus levels.

Domestic vs International Flights from Largest Airports in the U.S.

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Domestic vs International Flights from Largest Airports in the U.S.

The recovery in international flights has been particularly subdued, as many countries continue to require a mandatory two-week quarantine.

Less overall flying, combined with:

(i) increased costs associated with safety measures, plus

(ii) increased sanitation costs, plus

(iii) increased fuel costs, has resulted in collapse in profit margins. 

The gross profit margins, for the main U.S. airlines, are shown below.  

Gross Profit Margin for U.S. Airlines

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Gross Profit Margin for U.S. Airlines

Warren Buffett recently sold his airline stocks, arguing the world of travel has changed post Covid-19. We agree with his conclusion.  We expect personal and business travel to remain dislocated for at least the next 1-2 years. This expected lack of future demand combined with dangerously high debt levels, leads us to believe that investors continue to face asymmetric downside risk.