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The price of US airline default insurance has fallen sharply, with investors expecting the industry to secure a new round of bailout funding to help it reach a coronavirus vaccine Next year.
Even as the country’s major carriers consume cash at a rate of tens of millions of dollars a day, and pandemic Continuing to rage in the United States, airline credit default swap prices have fallen to levels not seen since March or, in some cases, February.
The stock prices of the big four carriers – American Airlines, Delta, United and Southwest – have also risen, outpacing the wider stock market since the publication of the first results of vaccine trials a month ago.
“The immediate existential threat has receded,” Berenberg analyst Adrian Yanoshik said. “And the second very obvious act is that a lot of people feel like the vaccines are coming, the world will open up and we will travel again next year.”
The cost of credit default swaps, which pay off when a company defaults on debts, is now a fraction of their May peak as airlines have drawn on public and private funds to improve their liquidity positions . CDS prices are used as a proxy for market opinion on a company’s creditworthiness.
They have plummeted in recent weeks, from 38% to 67% for the four major carriers.
On Monday, the market valued the Delta CDS at 368 basis points – meaning a buyer would pay $ 368,000 per year to insure $ 10 million of Delta debt against default for the next five years – with United at 559 bp and Southwest at 74 bp, according to IHS Markit.
The market continues to treat American, which has heavier debt than its peers, as a struggling entity. In addition to $ 500,000 per year, buyers of CDS protection over $ 10 million of its debt must also pay $ 2.5 million up front.
There is bipartisan support for an additional $ 17 billion in government funding for the airline industry in a new economic recovery plan in discussion on Capitol Hill. Lawmakers last week reported further progress towards a deal, though unrelated areas of disagreement dashed previous hopes for a stimulus package.
Airlines received $ 50 billion in U.S. Cares Act funds in March in exchange for hiring workers during the summer. More … than 350 airlines took the funds. Tens of thousands of employees have been put on leave since the program expired on October 1.
The collapse in demand for air travel since the spring has crushed US airlines’ revenues and profits, and they are still burning money faster than they expected.
Ed Bastian, managing director of Delta Air Lines, said in a note to staff last week that the carrier burns $ 12 million to $ 14 million a day as virus cases hit new records in the United States. Delta previously forecast that cash consumption would be reduced to $ 10 million per day by December, from $ 24 million in the third quarter.
American has placed its cash consumption at the peak of the forecasted $ 25 million to $ 30 million per day for the fourth quarter.
In addition to benefiting from a government bailout, airlines were able to replace cash with fundraising in public markets. United and American raised equity, while the Big Four raised debt, using assets like planes, landing slots and loyalty programs as collateral.
“The investment community is looking at the short-term negatives,” Cowen analyst Helane Becker wrote in a note to clients.
“The theme of value trading that is currently taking place in the market has clearly attracted additional capital to airlines given [year-to-date] performance, but at some point, fundamentals will take over, or at least matter.
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