3. If the whole market goes South, investors will be holding on very tight to their wallets. Another problem is that no one would lend to an airline that isn't making any kind of revenues. In most cases, as we saw in 2008/2009, rating companies will downgrade even the best of companies or countries to junk status rather quickly, making borrowing prohibitive even in a low interest environment.
2008/2009 is a financial/credit crunch. It was the bank doesn't trust each other, hence they stop lending to each other. This time, it's not an issue with the financial industry. The market is now literally awash with cash. You look at the 24-hr repo market and see how calm it is and you will understand. I have explained above clearly, the price of a bond is based on US treasury yield + risk premium. You talked about the risk premium being increased (e.g. rating downgrade), but 10-year UST yield is now at 93bp, which is way lower than what it was a week ago. Risk premium is not going to increase by that much. Not yet anyway. Many institutional investors are now holding on cash (and I mean billions of cash) and looking desperately for something to buy. Only the retail investors are scared and hold tight to their wallets. Institutional investors are not. Or at least they cannot hold tight for long. Because it is their job to invest in something. And that something cannot be cash. Delta has a relatively strong balance sheet now. It will attract bids. I cannot say the same for some other airlines. But for Delta, it's a good time to raise debt.
4. Buy oil, ok, with what money? As I explained a few posts back, even DL only has 3 billions of cash on their balance sheet and if you check their earnings reports, you will realise that their monthly payroll cost alone is 3 billions... Sell airplanes to save cash? To whom? All airlines will be in the same boat.
I am saying oil futures, not oil. You only need to put up collateral to execute a future contracts. And the collateral doesn't need to be cash. Granted, this is more for "planning for the good days in future" than surviving now, but if they expect to survive, then this is something that can be considered.
I followed the 2008/2009 crisis from closeby. I was in Ohio when just miles away, a 90-year shot herself when she knew that her home was being foreclosed.
My friends over there were worried about plummeting house values resulting in their homes being insufficient to be maintained as sole lien for their mortgage.
If this virus expands, I don't know if house values will be affected directly, but I know for a fact that people will earn less and lose purchase power and will have less room for repayments.
Italy has already issued a decree to allow households affected by the virus to stop loan repayments.
Back then during the Lehman crash US Treasury yields also took a dive as people looked for safe havens.
US treasury yields are not a measure of how much cash is around, but rather the broader confidence in the economy and confidence in the US Treasury.
It's true that there is cash and wealth in the open market currently, but that doesn't mean that people are ready to lend it to about anyone. In fact quite the opposite, the lower the interest yields, the less risk lenders and investors want to take. That's why everyone is fleeing to US treasury bonds and not corporate bonds.
Due to Covid19, airlines are getting few bookings and are processing refunds. In an extreme example, this means that sales (not revenue) could be negative. So even without taking into account costs, you could have negative cash flow. That's for instance why you see AF-KLM currently proactively offering free rebookings or vouchers for future travel, trying to avoid refunds.
Strongly negative cash flow means that you have negative repayment power. If you take a loan, it means that you'll be repaying the loan from your cash reserve, which defeats the purpose of taking the loan.
So if you issue corporate bonds with a maturity of say 5 years and the Covid19 crisis lasts 2 years, investors need to be sure that you have enough cash reserves to 1. survive the 5 years AND 2. repay the loan at maturity. In a negative cash flow environment, considering other debts that airlines already have, this quickly becomes a suicide mission.
I doubt that airlines issued bonds issued today will be subscribed even if the coupon is at 30%, regardless of how well US treasury yields are doing. Airlines stocks are freefalling for the same reason, there's no investor confidence.
Remember that the US treasury has the power to print money. Airlines have that too in good times (via earnings), but in very bad times, they are like hot coal, and these are very bad times.
4. About oil futures. Futures are just the price + market premium according to delivery date
For instance crude oil futures for a 2024 delivery are currently trading for the current barrel price + 10%.
If you purchase futures against collateral, you have to remember that the collateral will be weighted at market value.
An owned A320 that was worth 30 million USD in 2019 may now only be considered to be worth 3 million USD as collateral for a futures contract.
In that case it makes more sense to loan cash against aircraft collateral from a bank and purchase some long-term options, limiting your upfront expenditure, and building some cash reserves.
In my opinion, saving on fuel in 2024 is the least of the CFO's concern now.
Surviving the next 6 months is what they will be concerned about.
I also correct my previous comment of DL's payroll. 3 USD billion per quarter, not per month.
So DL has 3 billion in cash, a quarter's worth in payroll.
We're talking about DL, an airline that can be considered to be the top airline of the world in terms of profitability and management.
I don't want to think about all the rest of the industry. Flybe was just the unlucky one to be the first to go and unless Covid19 goes away, there will be many more and even the best ones will need bail-outs, against the rules of capitalism.