Air & Sea Travel: Where The Right Hook Punch of Corona Landed
- Around 90-95% of total capacity of the world commercial airlines are all grounded
- Airline and aircraft leasing sector are in a dire position with bulged and leveraged balance sheets
- Jet fuel demand is tanking and fast following the oversupply gluts in the oil markets
- One difference though: unlike floating oil tankers airplanes can’t store jet fuel and sit idle
- This comes at a time that the runways around the world look like airplane junkyards
- Cruise ships had the worst exposure as floating vessels of despair with stranded passengers
- An erosion of trust in the business model of cruise ships will bring new “bruised ships” to market
Keep an Eye On
COVID-19 has landed a major blow to various stakeholders and investors from airlines, aircraft manufacturers, shipping industry and the entire primary, secondary and tertiary suppliers in the value chain of air travel and sea transportation.
Airports will have to find a fine balancing act to remain liquid and avoid punitive levies on both airlines and passengers. The Duty Free retail is hit hardest, and one would be curious to know where all those products and agreements have been diverted to during theses crises?
Many of the airlines have public or quasi government shareholders (e.g. Air France KLM 28% owned by Dutch and French governments). Some of these ownerships will most likely come to public markets in a post pandemic era. The willingness and uptake by investors and public would be a different story.
Boeing will face much stronger headwinds than Airbus. The order books of both will have to take a backseat and 737 Max debacles are yet to have any progress. This could lead to the faith of IBM’s takeover by Lenovo. Call it far-fetched but we are in a new world and there are some precedents in rear mirror view already.
Pilots have to keep a rigid and frequent regime in training and certification. Any pilot, who has not flown for more than 90 days, has to go back to a simulator and instructor. Assuming that flights will resume eventually, the current number of simulators would not be enough to accommodate the need. Never before investing in a flying-simulator has been better deal than investing in the actual flying aircraft itself!
Carnival Corp. and Princes Cruise ships have been burrowing and restructuring their debt at 12% -14% just to stay afloat. Even a bank with these rates in era of negative interest rates would start to sink. It will take a good 18-24 months if not longer before people regain confidence for being on a boat with thousands of fellow passengers. By then these ships will be sitting idle.
On back of all of these challenges the US high-yield burrowing, loan and bond markets have bulged like a giant flying Zeppelin. The flight seems exciting and yet a small puncture in body of these ballooning debt vehicles can bring them down faster than COVID-19 grounded the entire industry.
By the way a cruise ship can cost $500m with 6,000 cabins on-board. With ingenuity some of the cruise ships could be turned into anchored, moored floating flats with the amenities & designs reimagined. That would translate to $ 83K/Cabin/Room. For those of you rushing to the port to buy one, remember and beware that these residences cannot provide “offshore status”!
Ali Borhani is the Managing Director of 3Sixty Strategic Advisors Ltd. It is the readers’ responsibility to verify their own facts. The views and opinions expressed in this article/commentary are those of the author’s and do not necessarily reflect the official policy or position of any other individual, agency, organization, employer or company.