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Could $1,400 Stimulus Checks Lift Air Travel Demand?

Summary:
President Joe Biden’s massive .9 trillion stimulus package took a giant step toward becoming reality today as the Senate narrowly voted to approve the measure. Squeaking by with a final tally of 51-50—Vice President Kamala Harris cast the tie-breaking vote—the resolution includes ,400 checks to individuals earning under ,000, expand federal unemployment benefits and raise the minimum wage to an hour. The resolution now moves on to the House and, if approved there, will be legislated in as many as 25 different committees across both chambers of Congress. It’s highly doubtful that the final bill will be a carbon copy of the resolution—to the relief of budget hawks—but it’s hoped that an extra ,400 in the pockets of everyday Americans may help support lagging consumption. U.S.

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Could $1,400 Stimulus Checks Lift Air Travel Demand?

President Joe Biden’s massive $1.9 trillion stimulus package took a giant step toward becoming reality today as the Senate narrowly voted to approve the measure. Squeaking by with a final tally of 51-50—Vice President Kamala Harris cast the tie-breaking vote—the resolution includes $1,400 checks to individuals earning under $50,000, expand federal unemployment benefits and raise the minimum wage to $15 an hour.

The resolution now moves on to the House and, if approved there, will be legislated in as many as 25 different committees across both chambers of Congress.

It’s highly doubtful that the final bill will be a carbon copy of the resolution—to the relief of budget hawks—but it’s hoped that an extra $1,400 in the pockets of everyday Americans may help support lagging consumption. U.S. consumer spending fell slightly for a second straight month in December.

I believe the stimulus may also help support commercial air travel. With vaccine distribution scheduled to improve, a greater number of travel-starved individuals and families may jump at the chance to book a well-needed vacation, possibly as early as this summer.

This, in turn, may prompt investors to book a flight on airlines stocks, which are already recovering steadily along with U.S. government bond yields. Yields go up, remember, when safe-haven demand for Treasuries goes down.

Could $1,400 Stimulus Checks Lift Air Travel Demand?

Another positive sign that the economy is recovering is the stellar manufacturing report for January. The IHS Markit U.S. Manufacturing PMI clocked in at 59.2, the highest level in the series’ history. This is bullish not just for the airline industry but also industrial metals and raw materials.

Could $1,400 Stimulus Checks Lift Air Travel Demand?

Commercial aviation still has some challenging times ahead of it, but I believe the worst is behind us, meaning now may be an opportune time to get exposure to an industry that’s on sale right now at a deep discount.

Below are five additional reasons why I think airline stocks could be a buy in 2021.   

Globally, new virus cases are starting to roll over.

Worldwide, new daily cases of infection appear to be declining, according to data from John Hopkins University. From its peak in January, the seven-day rate has slowed to its lowest level since early November. In the U.S., the number of total daily hospitalizations has also been falling pretty steadily since early January.

Could $1,400 Stimulus Checks Lift Air Travel Demand?

Not every country’s cases are dropping, though. Hotspots include Southern and Central Europe—particularly Portugal, Spain and Italy—and South America.

New variants of COVID-19 are also concerning and could contribute to a longer delay in the airline industry’s recovery.

The good news is that the vaccines already being distributed so far appear to work against the mutations.

2. Vaccine distribution in the U.S. is about to ramp up.

I was fortunate enough to receive my first dose of the vaccine last month—I shared my experience with Kitco’s David Lin, which you can watch here—but too many Americans have hit roadblocks trying to get theirs.

That may be set to change in the coming weeks and months. The Biden administration said recently that it would be sending a minimum of 10.5 million doses of the vaccine per week for the next three weeks across of the U.S. Starting next week, many of these doses will be going directly to pharmacies such as CVS and Walgreens.

The hope is that by the end of summer, 300 million Americans will have been fully vaccinated against the virus. As of Monday, some 26.5 million people had already gotten their shots, so I believe this goal, while ambitious, is achievable.

This makes me incredibly bullish of summer travel demand in general and commercial air demand specifically. Getting exposure now to beaten-down carriers could pay off later when vaccinated families start booking flights for summer vacation.

3. Airlines’ ancillary revenues actually increased in 2020 on a per-passenger basis.

I’ve written about the importance of airlines’ ancillary revenues before. These are the fees that passengers choose to pay for add-ons like extra baggage, assigned seating, credit cards and more.

Between 2010 and 2019, revenues from such services consistently grew year-over-year as people became more willing to pay extra for a more comfortable flying experience.

It should surprise no one that the pandemic squeezed this revenue stream. Total global ancillary sales plunged 47% in 2020 to an estimated $58.2 billion, from $109.5 billion a year earlier.

What may surprise you to know, however, is that ancillary revenues actually rose for the year on a per-passenger basis, according to research from IdeaWorks and CarTrawler.

United Airlines’ fees rose the most, from around $41 per passenger in the third quarter of 2019 to as much as $65 in the same quarter a year later—representing an remarkable increase of 59%. Alaska, Southwest, Air Canada, Ireland’s Ryanair and Hungary’s Wizz Air also saw double-digit growth.

Writes Aileen McCormack, CarTrawler’s chief commercial officer, this increase suggests that “an outstanding customer experience is not only recession-proof, but also pandemic-proof.”     

Could $1,400 Stimulus Checks Lift Air Travel Demand?

One carrier in particular is attributing ancillary revenues to its profitability in 2020. VietJet Air, a low-cost international carrier operating in Vietnam and one of the very few to make money during the pandemic, reported an after-tax profit of $3 million last year after moving to boost its cargo capacity and ancillary services.

4. Leisure travel is expanding in China and other Asian regions that have successfully contained the virus.

China is the only major economy to report economic growth in 2020, and its domestic commercial aviation industry has rapidly rebounded following stringent lockdowns in early 2020. (International flights are another story.) As such, I believe the country serves as an interesting model of what we may be able to expect here in the U.S. and elsewhere once we get the virus under control.

Could $1,400 Stimulus Checks Lift Air Travel Demand?

As you can see above, the number of seats offered on domestic flights in China quickly rebounded, eventually surpassing 2019 levels by late summer/early fall. Despite a slowdown at the start of this year, they’re still well ahead of other regions on a relative basis.

Looking ahead five to six months, consultancy group Bain & Company sees China’s aviation industry recovering the fastest among other G-20 nations. By the end of July, the country’s airline passenger volume is projected to be at 90% of pre-pandemic levels. Compare that to the U.S., which is projected to be at 57% capacity relative to 2019.

Could $1,400 Stimulus Checks Lift Air Travel Demand?

5. We’re seeing airlines adding routes, hiring new pilots and making capital investments—all signs that they’re confident in the future.

One of the surest signs that companies are betting on a turnaround in business conditions is when they start expanding and making capital investments. While certainly not all airlines are in expansion mode right now—in fact, too many are still having to make dramatic spending cuts—I’m seeing a number of corporate decisions being made that give me optimism.    

For one, airlines are beginning to add new routes to their networks to take advantage of voids left by competitors due to the pandemic.

This is precisely Southwest’s strategy. The Dallas-based carrier is pushing into two large airports, Chicago’s O’Hare International Airport and Houston’s George Bush Intercontinental Airport, both historically dominated by rivals United and American. For the first time in five years, United will be returning to New York’s John F. Kennedy International Airport this year, having already adding over a dozen new flights, including one from Denver to Belize City, Belize.

Incredibly, some carriers are hiring new pilots at this time, including American’s PSA Airlines and low-cost Frontier Airlines.

Other carriers, meanwhile, are making capital investments, including taking delivery of new aircraft. JetBlue has just unveiled a revamp of its popular luxury Mint suites, allowing passengers to make transatlantic flights for the first time in comfort and style.

As for new aircraft, travel analytics firm Cirium expects the recently ungrounded Boeing 737 Max to see its best years following a dismal 2020. Says Cirium’s Max Kingsley-Jones, “Boeing is aiming to ship around half of its surplus of undelivered aircraft during 2021 and most of the remainder through 2022, with the pre-built backlog fully cleared during 2023.”

Could $1,400 Stimulus Checks Lift Air Travel Demand?

Keep in mind that airline stocks, particularly now, can be highly volatile compared to the broader market. The daily volatility, or standard deviation, of airline stocks is ±4%, versus ±1% for the S&P 500 Index.

 

Gold Market

This week spot gold closed the week at $1,814.11, down $3.54 per ounce, or 1.82%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week essentially unchanged. The S&P/TSX Venture Index came in up 10.91%. The U.S. Trade-Weighted Dollar rose 0.41%.

Date Event Survey Actual Prior
Jan-31 Caixin China PMI Mfg 52.6 51.5 53.0
Feb-1 ISM Manufacturing 60.0 58.7 60.5
Feb-3 CPI Core YoY 0.9% 1.4% 0.2%
Feb-3 ADP Employment Change 07k 174k -78k
Feb-4 Initail Jobless Claims 930k 779k 812k
Feb-4 Durable Goods Orders 0.2% 0.5% 0.2%
Feb-5 Change in Nonfarm Payrolls 105k 49k -227k
Feb-10 Germany CPI YoY 1.0% 1.0%
Feb-10 CPI YoY 1.5% 1.4%
Feb-11 Initial Jobless Claims 775k 779k

Strengths

  • The best performing precious metal for the week was palladium, up 5.12%, despite hedge funds rolling out of palladium and into platinum according to the latest data. Silver futures on the Comex jumped as much as 13% on Monday and pushed prices above $30 an ounce briefly.
  • Demand for physical precious metals remains strong. Gold coin sales at the U.S. Mint hit 220,500 ounces in January, the highest monthly total since 2009. The Mint also reported silver coin sales of 4.775 million ounces in January, a 24% increase and the highest for a January since 2017. On Tuesday, approximately $1.7 billion flowed into the iShares Silver Trust, flying past the all-time high set last Friday. Citigroup said silver could reach $33 an ounce by next week and possibly $36 to $38 an ounce in March if strong inflows continue into ETFs backed by the metal.
  • The London Bullion Market Association (LBMA) released its annual price forecast report, and all four precious metals are expected to see double digit gains. LBMA analysts forecast the following: gold up 11.5%, silver up 38.7%, platinum up 28.2% and palladium up 11.2% for the year. With the gold market expected to be relatively tame through 2021, the LBMA said it expects all eyes to be on silver.

Weaknesses

  • The worst performing precious metal for the week was gold, down 1.82%. Both gold and silver traded lower this week on a strengthening U.S. dollar and a steepening yield curve.
  • Early in the week, silver spiked with the Reddit-fueled rush. Silver fell more than 5% after the CME Group increased margin requirements for futures. Margins were raised by 18% on Comex futures to $16,500 per contract.
  • According to preliminary data released by the U.S. Geological Survey, gold output in 2020 fell for the first time in 12 years to around 3,200 metric tonnes, or 3% less than 2019. The production drop was largely caused by pandemic related shutdowns of mining operations. Kitco News notes the report found nine of the top 10 largest gold producing countries saw a decline.

Opportunities

  • Turkey’s sovereign wealth fund (TWF) plans to invest $15 billion in energy, petrochemicals and gold mining as a part of a program designed to reduce the economy’s vulnerabilities, reports Bloomberg. The fund hopes to ramp up gold exploration in 20 license areas and plans to boost domestic gold production to as much as 150 tons per year, up from just 42 tons now.
  • Zambia isn’t looking to take over more mining companies, nor is the government planning to nationalize the industry, according to Finance Minister Bwalya Ng’andu and as reported by Bloomberg News. The government has previously acquired Glencore and Vedanta’s local operations. This is positive news for other operators in Zambia such as First Quantum Minerals and Barrick Gold which have large copper mines.
  • Northam Platinum, South Africa’s fourth largest platinum producer, is considering bidding for the Bokoni mine, which is jointly owned by Anglo American Platinum and Atlatsa Resources. Northam is hoping to boost output amid a bullish demand and price outlook for platinum group metals. This is positive for South Africa, which saw several mines close as producers struggled to contain costs.

Threats

  • Bloomberg’s Jake Lloyd-Smith wrote this week that the outlook for gold is diminishing. “At the year’s outset, I was positive on gold… Such a view now looks misguided. With a test of $1,800 soon in the offing, bullion may be about to lose more altitude.” Llyod-Smith points out that gold has been left out of the broad rally in commodities so far in 2021.
  • Burgeoning mining hotspot Ecuador is voting on Sunday, alongside presidential and legislative elections, to decide whether to ban major mining projects within municipal limits. Bloomberg reports there are no big mines operating in Cuenca in the southern Andes mountains, but the referendum threatens to derail more than 40 concessions seeking to mine gold, silver and copper reserves.
  • Rhodium has skyrocketed to a record $21,900 an ounce, making it the world’s most expensive metal. Anglo American Platinum CEO Natascha Vilkoen says the 25% increase so far this year is unsustainable. “Even though we love the additional income, that’s not where we prefer it to stay,” Viljoen said in an interview on Wednesday. Rhodium has surged due to strong demand out of China for vehicles and water leaks shutting down processing facilities in South Africa several times last year, reports Bloomberg, creating a deficit.

Could $1,400 Stimulus Checks Lift Air Travel Demand?

Could $1,400 Stimulus Checks Lift Air Travel Demand?

Index Summary

  • The major market indices finished up this week. The Dow Jones Industrial Average gained 3.89%. The S&P 500 Stock Index rose 4.65%, while the Nasdaq Composite climbed 6.01%. The Russell 2000 small capitalization index gained 7.70% this week.
  • The Hang Seng Composite gained 4.28% this week; while Taiwan was up 4.39% and the KOSPI rose 4.85%.
  • The 10-year Treasury bond yield rose 10 basis points to 1.168%.

Read the remainder of the article at https://www.usfunds.com/investor-library/investor-alert/could-1-400-stimulus-checks-lift-air-travel-demand/

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

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