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Will the Paris Terrorist Attacks Hurt Major Airlines?
Airline stocks are falling due to concerns about travel demand in the aftermath of last week's terrorist attacks in Paris.
Adam Levine-Weinberg (TMFGemHunter) Nov 16, 2015 at 4:30PM
The terrorist attacks that struck Paris last Friday have put airline investors on the defensive. Shares of American Airlines (NASDAQ:AAL), Delta Air Lines (NYSE:DAL), and United Continental (NYSE:UAL) had already started to give up their October gains last week, and they all fell again by 2%-3% on Monday morning.
AAL Price Chart
WEEKLY AIRLINE STOCK PERFORMANCE, DATA BY YCHARTS
Does this pullback in major airline stocks represent a warning sign of more trouble to come? Or is it a good opportunity to invest in these companies? Let's take a look.
The terrorism threat will hit demand
Among U.S. commercial airlines, American, Delta, and United are the only three that fly to Europe.
The direct impact to them from the terrorist attacks last week was relatively minimal. While France closed its borders immediately following the attacks, the airports remained open. So while there were some delays and one cancellation (an American Airlines roundtrip from Dallas-Fort Worth), most flights operated normally.
However, just because flights are operating doesn't mean that customers will want to fly. Several people that spoke to the Associated Press had canceled trips to France or were considering doing so due to fear about potential follow-on attacks.
Airline American Airlines Plane Aal
SOME PEOPLE ARE CANCELING PLANNED TRIPS TO PARIS. PHOTO: AMERICAN AIRLINES
Aside from security concerns, tourists have also faced uncertainty about what they would be able to do in Paris. Numerous major landmarks like the Louvre and the Eiffel Tower were closed over the weekend, although they reopened on Monday afternoon. Travelers have also been warned that movement through the city may be restricted.
Notable geopolitical events also have a way of disrupting demand more broadly in the short term. For example, United Continental reported that China's relatively insignificant devaluation of the yuan in August caused a temporary drop-off in bookings for travel between China and the U.S. A major terrorist attack could have a much bigger effect.
How big is the impact?
That said, American, Delta, and United don't have so much capacity deployed in France that a downturn there would have a dramatic impact on their results.
Delta Air Lines has the most to lose, as it has a joint venture with Air France-KLM and Alitalia for transatlantic flights. As part of that JV, Delta operates more flights to Paris than either American Airlines or United Continental, allowing customers to connect via Air France to other destinations. The JV also includes a revenue-sharing and cost-sharing scheme for transatlantic flights, so Delta has a stake in Air France's profitability on transatlantic routes.
Even for Delta, the entire transatlantic market represents less than 20% of total revenue. Much of that traffic flows through other major European hubs -- mainly London and Amsterdam -- or directly from the U.S. to other cities in Europe, Africa, India, and the Middle East. This should blunt the impact of any drop in demand for travel to (or through) Paris.
Airline Delta Air Lines Dal Airbus A
DELTA HAS THE MOST EXPOSURE TO FRANCE OF ANY U.S. AIRLINE. PHOTO: THE MOTLEY FOOL
Additionally, while American, Delta, and United all waived change fees for customers traveling to or through Paris, none of these waivers extends beyond Nov. 22. Furthermore, airlines are offering only to change customers' travel dates. They aren't providing refunds for non-refundable tickets. The tickets they have already sold for the next few months represent a cushion against any short-term drop in travel demand.
This too shall pass
Unlike the 9/11 attacks, the attacks in Paris last week did not specifically target air travel. As a result, while there was a broad-based downturn in air travel following 9/11, there is no reason to expect that to occur here.
Airlines -- and airline investors -- should be prepared for a few weeks or even a few months with significantly fewer people buying tickets to Paris. There could even be a modest impact on other air travel due to the inevitable uncertainty about whether other major cities will be next.
However, American Airlines, Delta Air Lines, and United Continental face this situation from a position of strength -- they all have double-digit profit margins. This makes a travel downturn that is mainly limited to a small proportion of their global route networks quite manageable.
Furthermore, oil prices are sliding again, providing another tailwind for airline profitability. Finally, all three airline stocks already trade for less than 10 times projected 2016 earnings, so there's plenty of margin for error in case it takes longer than expected for demand to recover in the coming weeks and months. This should help the airlines bounce back relatively quickly from this unfortunate incident.
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Adam Levine-Weinberg owns shares of United Continental Holdings, and is long November 2015 $40 calls on American Airlines Group and long January 2017 $40 calls on Delta Air Lines, The Motley Fool is long January 2017 $35 calls on American Airlines Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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Financial Advice for My New Son
You'll care about this one day.
Morgan Housel (TMFHousel) Oct 13, 2015 at 5:57PM
My wife and I welcomed a son into the world on Sunday. It's the coolest experience anyone could ask for.
His only interest right now is keeping us awake 24/7. But one day -- a long time from now -- he'll need to learn something about finance. When he does, here's my advice.
1. You might think you want an expensive car, a fancy watch, and a huge house. But I'm telling you, you don't. What you want is respect and admiration from other people, and you think having expensive stuff will bring it. It almost never does -- especially from the people you want to respect and admire you.
When you see someone driving a nice car, you probably don't think, "Wow, that person is cool." Instead, you think, "Wow, if I had that car people would think I'm cool." Do you see the irony? No one cares about the guy in the car. Have fun; buy some nice stuff. But realize that what people are really after is respect, and humility will ultimately gain you more of it than vanity.
2. It's normal to assume that all financial success and failure is earned. It mostly is, but only up to a point -- and a lower point than many think.
People's lives are a reflection of the experiences they've had and the people they've met, a lot of which are driven by luck, accident, and chance. Some people are born into families that encourage education; others are against it. Some are born into flourishing economies encouraging of entrepreneurship; others are born into war and destitution. I want you to be successful, and I want you to earn it. But realize that not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself.
3. This may sound harsh, but I hope you're poor at some point. Not struggling, and not unhappy, of course. But there's no way to learn the value of money without feeling the power of its scarcity. It teaches you the difference between necessary and desirable. It'll force you to budget. It'll make you learn to enjoy what you have, fix what's broken, and shop for a bargain. These are essential survival skills. Learn to be poor with dignity and you'll handle the inevitable ups and downs of financial life with ease.
4. If you're like most people, you'll spend most of your adult life thinking, "Once I've saved/earned $X, everything will be great." Then you'll hit $X, move the goalpost down the field, and resume chasing your tail. It's a miserable cycle to be in. Save your money and strive to get ahead. But realize your ability to adjust to new circumstances is more powerful than you think, and your goals should be about more than money.
5. Don't stay in a job you hate because you unwittingly made a career choice when you were 18 years old. Your dad shakes his head at college freshmen choosing a major to guide their lifelong careers. Almost no one knows what they want to do at that age. Many don't know what they want to do until they're twice that age.
6. Change your mind when you need to. I've noticed a tendency for people to think they've mastered investing when they're young. They start investing at age 18, and think they have it all figured out by age 19. They never do. Confidence rises faster than ability, especially in young men. Learn the skill of changing your mind, discarding old beliefs and replacing them with new truths. It's hard, but necessary. Don't feel bad about it. The ability to change your mind when you're wrong is a sign of intelligence.
7. The best thing money buys is control over your time. It gives you options and frees you from relying on someone else's priorities. One day you'll realize this freedom is one of the things that makes you truly happy.
8. The road to financial regret is paved with debt. Also, commissioned salesmen. But mostly debt. It's amazing what percentage of financial problems are caused by borrowing. Debt is a claim on your future, which you'll always miss, in order to gain something today, which you'll quickly get used to. You'll likely use some debt, like a mortgage. That's OK. But be careful. Most debt is the equivalent of a drug: A quick (and expensive) hit of pleasure that wears off, only to drag you down for years to come, limiting your options while weighed down by the baggage of your past.
9. Your savings rate has a little to do with how much you earn, and a lot to do with how much you spend. I know a dentist who lives paycheck to paycheck, always on the sliver's edge of financial ruin. I know another who never earned more than $50,000 and saved a fortune. The difference is entirely due to their spending.
How much you make doesn't determine how much you have. And how much you have doesn't determine how much you need.
Don't become a money hoarder or a miser. But realize that learning to live with less is the easiest and most efficient way to gain control of your financial future.
10. Don't listen to me if you disagree with what I've written. Everyone's different. The world you grow up in will have different values and opportunities than the one I did. More importantly, you'll learn best when you disagree with someone and then are forced to learn it yourself. (On the other hand, always listen to your mother.)
Now, please let me sleep.
Find this article informative?
The Motley Fool's mission is to help the world invest, better. We have done this over the past 20 years by thinking long term and outside the box. To learn more, click here now.
Contact Morgan Housel at mhousel@fool.com. The Motley Fool has a disclosure policy.
Game of Drones: The Pentagon Makes an Earth-Shattering Announcement
All of a sudden, it's open season for drones.
Rich Smith (TMFDitty) Nov 14, 2015 at 8:13AM
"Drones for sale! No reasonable offer refused! And if you order the Hellfire missile package, we'll throw in a satellite radio subscription for free!"
OK, that last bit may not be technically accurate. But all of a sudden, the U.S. government does seem to be very interested in expanding its share of the global market for drones.
File
IMAGE SOURCE: CPL STEVE BAIN ABIPP/MOD FOR UK MINISTRY OF DEFENCE.
According to a recent report out of IHS Jane's, the global market for military drones was worth about $6.4 billion in 2014 -- and growing. In less than 10 years, Jane's estimates, military drone sales worldwide could exceed $10 billion.
Unfortunately (for defense contractors, and the investors who own them), the U.S. has largely shunned this market in recent years, strictly limiting the situations in which international sales of unmanned aerial vehicles can be approved. Data from the U.S. Defense Security Cooperation Agency -- DSCA, the arm of the Pentagon responsible for coordinating foreign arms sales -- indicate that only a handful of such sales have taken place over the past decade.
For example, from 2008 through 2015, Congress authorized the sale of General Atomics MQ-9 Reaper drones to just five foreign countries -- France, Germany, Spain, the Netherlands, and Italy. In 2014, Congress also approved the sale of four Northrop Grumman (NYSE:NOC) Global Hawk spy drones to South Korea. (Japan is in negotiations to buy three more Global Hawks from Northrop Grumman.) This past summer, the U.S. sold an unspecified number of AeroVironment (NASDAQ:AVAV) RQ-11B Raven drones to Ukraine as well.
Raven
AN AEROVIRONMENT RAVEN DRONE IS TINY -- BUT IF YOU SELL ENOUGH OF THEM, THE SALES ADD UP. IMAGE SOURCE: AEROVIRONMENT.
Now, AeroVironment sells a lot of drones -- $221 million worth last year, according to data from S&P Capital IQ. But most of AeroVironment's drones, including those heading for Ukraine, are unarmed. In fact, the common element to all of these sales is that the drones involved are unarmed. Contrariwise, Congress almost never authorizes the sale of armed -- or "weaponized" -- drones abroad. (Indeed, up until last week, the only other country known to have acquired armed drones from the U.S. was the U.K. -- with whom we've always had a "special relationship.")
Last week, that changed.
Times change
On Tuesday, Nov. 3, DSCA notified Congress of plans to sell to Italy a weapons package of:
156 AGM-114R2 Hellfire II missiles
30 GBU-12 laser guided bombs
30 GBU-38 Joint Direct Attack Munitions (JDAMs)
30 GBU-49 Enhanced Laser Guided Bombs
30 GBU-54 Laser JDAMs
All of this ordnance, plus 26 bomb racks, 13 M-299 missile launchers, and six MQ-9 weaponization kits, are intended to "weaponize" the Italian Air Force's six MQ-9 Reapers.
Presumably, the plan is to arm these six Reapers with two Hell-firing missile launchers apiece, as well as four bombs. It is also possible, though, that Italy plans to use some of the armament to weaponize its six General Atomics MQ-1 Predator drones.
What it means to you
Exactly why Italy wants armed drones in its air force isn't clear. DSCA says only that "it is in the U.S. strategic interest to support Italy's security contributions as a capable and interoperable ally," and that the drones will "support and enhance burden sharing in NATO and coalition operations" in which Italy participates. Italy's proximity to such hotspots as Syria, Libya, and a southwestward-expanding Russia, however, suggests a few reasons Congress might be inclined to approve the sale.
More important to us as investors is what this weaponization of exported drones means for the American defense contractors that sell these weapons. Historically, Israel has played an outsize role in international drone sales, with the U.S. a close second, and Europe lagging far behind. But Reuters reports that U.S. companies, including General Atomics in particular but also Northrop Grumman and Textron (NYSE:TXT) (Textron makes the Shadow armed drone), have been lobbying Congress for months to unshackle their sales forces and authorize more international sales of armed drones.
Those shackles started to loosen earlier this year when the U.S. State Department laid out a new policy allowing sales (under strict conditions) in February. This month's Italian arms deal suggests it may soon become open season on armed drone sales in the very near future.
Good news? Bad news? Critics will certainly argue the latter. But the plain fact of the matter is that a "$10 billion market" for drones is clear proof that there's demand for these products. Northrop, Textron, and AeroVironment shareholders can be forgiven for arguing: Someone is going to meet this demand, and it might as well be us.
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Www
TEXTRON'S SHADOW UAV IS ONE OF THE SMALLEST UAVS KNOWN TO BE "WEAPONIZABLE." IMAGE SOURCE: U.S. ARMY, USED WITH PERMISSION OF TEXTRON SYSTEMS.
Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 299 out of more than 75,000 rated members.
The Motley Fool owns shares of and recommends AeroVironment. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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