Raymond James Aviation Analyst Savi Syth joined Yahoo Finance Live breaks down how the return of the Boeing 737 Max will help the aviation market as COVID-19 continues to cause a slump within the market.
ADAM SHAPIRO: Take a look at the airlines. Delta is off, again, about a quarter of a percent. United Airlines off about a quarter percent. Southwest, They’re up almost half a percent. And then there’s American Airlines. They are down more than 1% today.
Let’s talk about everything that’s going on because it was a momentous day with that 737 Max, the American Airlines flight from Miami to LaGuardia here in New York. To help us understand what’s happening with the airlines, with Boeing and everything in general that involves the airlines, we invite in Raymond James Analyst Savanthi Syth. Savi, it’s good to see you, and we appreciate your being with us. What did you think when you saw that American Airlines flight, finally passengers once again on the 737 Max?
SAVI SYTH: I think it’s been a long time coming, and it’s good for the industry. And then this is an aircraft that has been severely vetted across the globe, and I think it’s ready to take flight, and it’s good. It’s not making as much of a splash as maybe it would have if we weren’t going through COVID, but it’s a good occasion for a lot of airlines.
SEANA SMITH: Savi, going off the 737 Max, we know that it’s more cost effective, a more cost-effective plane. I guess I know it’s a little bit too early to tell, and there’s not many flights that will be using the 737 Max, at least off the bat. But how big of a help could this potentially be to American during such a difficult time for the industry?
SAVI SYTH: Again, when aircraft are being flown all full out, it would have been a lot more important. It was a big drag for American in 2019, as it was for all the airlines that operate the aircraft like Southwest or like Ryanair. And so it will be positive.
It’s more fuel efficient. It’s, you know, better technology, gets you, you know, better distance and things like that. So it’s going to be important for American. Again, not as important or as meaningful in this current environment, but it’s still every little bit helps.
ADAM SHAPIRO: Savi, you’re one of those analysts that journalists quote in their stories about the airlines, and we got your most recent note looking forward to 2021. You’ve got a rating, I guess, of underperform for American. Part of this has to do with the debt they’ve taken on, but I imagine part of it would have to do as well with the cash on hand that they have. What’s the greater thing that as an investor I should pay attention to as they go into the next year?
SAVI SYTH: For all these airlines, I think, you know, the cash on hand was a bigger concern back in March, April when we– especially when we didn’t have a vaccine on the way. Hopefully if the vaccine’s effective, we should start to see passenger numbers steadily increase, at least starting kind of the middle of 2021. So I think there’s enough cash on hand, especially with the CARES Act loan, for these airlines to not have to worry about liquidity.
So the bigger concern is the level of debt. American is in a, you know, good position when you think about it. They’re mostly– you know, they’re more domestic than Delta and United. They have just as much business so that business recovery will be important, but they’re also less exposed to the coastal areas which have been more impacted by– you know, the demand has been impacted by COVID.
So I think American has been in a relatively better position. That said, coming out of this, there are– they have a mountain of debt that they’re going to have to work themselves through, and that’s the reason for underperform rating. Not necessarily a cash concern but more of a debt concern.
ADAM SHAPIRO: What I hear you say is somewhat optimistic for American, so let me ask you this because it’s what they call VFR, Visiting Friends and Relatives, that will lead the recovery. And in your note– I think it’s an 88-page note– you also talked about United. United didn’t make the fleet changes that the others made. So is United poised, perhaps, to capture more of that VFR market?
SAVI SYTH: It really depends, I think, more on your network. And from that perspective, VFR is an important one, but also leisure destinations has been important. And American has, you know, Miami. It has Phoenix. It has a lot more of that sun-and-surf destination than United does right now. So from that perspective, American is slightly better positioned to kind of capture– and it has been in a position to capture that, both the VFR and that leisure traffic.
And, you know, in the recovery, it would be interesting to see, given that people in kind of the Northeast and the West Coast haven’t traveled as much in COVID, do we get a pent-up demand– you know, some phenomena happening that might help those airlines that are more in the coastal areas? But I would expect that that would be more of a kind of mid-2021 or second-half 2021 phenomenon.
SEANA SMITH: Savi, in your recent note you also have the strong buy on Allegiant, saying that’s the best positioned US airline in the near to medium term. I’m just curious why you think Allegiant travels in a stronger competitive position right now compared to the others.
SAVI SYTH: Yeah, and that goes back to I think if you look at who’s flying today, it’s predominantly leisure. It’s predominantly VFR. And also Allegiant doesn’t have as much of that coastal exposure. And so they are– their target passenger is more in the area that’s willing to fly today. They are 100% leisure and VFR focused, so they don’t really rely on business demand.
So in the near term, they are well positioned, and there’s something unique about Allegiant’s business model. They only fly the aircraft on peak demand days. They buy kind of a used, older aircraft, midlife aircraft that don’t have as much ownership costs, so they are not required to fly them all hours of the day and throughout the year. And so their business model is a bit more set up for this kind of level of low utilization that we’re seeing today.