Alternative Investment

Thanksgiving Air Travel Demand Supported by Remote and Hybrid Work

Commercial air travel in the U.S. was incredibly robust this week, with passenger volumes close to 2.3 million per day. Thanksgiving was a major driver of demand, of course, but there may be another reason why travelers were able to board planes consistently throughout the week: remote and hybrid work.

Even though most offices and businesses have fully reopened following the pandemic, remote and hybrid work remains the norm for millions of American workers, allowing them to save both time and money they would have otherwise spent on commuting.

Working off-site has been a huge benefit to not just customers but also airlines, according to Helena Becker, an airlines analyst at Cowen. This type of work “enables [airlines] to be less ‘peaky’” and enables customers “to get better pricing,” Becker says.

Robert Isom shares the same idea. Speaking at last week’s Skift Aviation Forum in Dallas, the American Airlines CEO said that “demand is more spread out” due to the rise in remote work, adding that consumers, airlines and airports are no longer “beholden to the structure of the past.” 

This helps explain why air travel demand was strong throughout the week instead of it being concentrated on the days immediately preceding and following Thanksgiving Day, as has historically been the case. On Sunday and Monday, more people boarded commercial jets than they did on the equivalent days in 2019, according to Transportation Security Administration (TSA) data.

Daily Number of US commercial Passengers Has Remained Above 2 million

What Americans Have Gained by Working Remotely

Remote work isn’t the perfect fit for every company or employee, but the potential benefits are easy to see.

According to Global Workplace Analytics, people who work remotely, either full-time or part-time, can save between $2,000 and $7,000 annually in transportation and work-related costs. They can also gain back the equivalent of two to three weeks per year in commuting time. An estimated $20 billion could collectively be saved at the pump.

With offices now fully open, you might think that remote and hybrid work is disappearing, but the opposite appears to be true. Gallup, the analytics and advisory firm, found that work away from home actually increased in 2022, accounting for 49% of the U.S. labor force in June, up from 42% in February. “Fully on-site work is expected to remain a relic of the past,” the firm says, though you’re welcome to disagree.

Will “Workcations” and “Bleisure” Replace Corporate Travel?

This week I was in Dubai, attending and speaking at the Alternative Investment Management, or AIM, Summit, and I also had the opportunity to take in the World Cup in Qatar.

I suspect there were hundreds more World Cup spectators who were also combining work and vacation (workcation), business and leisure (bleisure).

For the past year and a half, analysts and the media have questioned whether corporate business travel will ever return to pre-pandemic levels, as leisure travel has. An October survey of corporate travel managers in the U.S. found that domestic business travel volume has returned to 63% of 2019 levels, while international business travel is still only at 50%. Based on current trends, it may take until 2024 or 2025 before corporate spending on travel has fully recovered to pre-pandemic levels.

Thanks to the widespread acceptance of remote work, however, bleisure travel appears to be replacing traditional corporate travel, if not on a revenue basis (business class can cost three to four times as much as economy class) then certainly by volume. Domestic and international load factors, which measure the seat utilization rate on a scheduled flight, have returned to pre-pandemic levels.

The same can somewhat be said about airlines’ profitability. As most of you know, EBITDA stands for earnings before interest, taxes, depreciation and amortization. It tells you how much profit a company made before debt and taxes were paid and before non-cash items like depreciation and amortization were factored in.

Looking at EBITDA for the Big Four U.S. carriers, we see that profitability is nearing pre-pandemic levels, even as American, United and Delta reported record revenues in the third quarter of 2022.

Airline EBITDA at Approximate Pre-Pandemic Levels

Lower Fuel Costs Would Be a Windfall

As you may have noticed, airfares have risen due to inflation, but they haven’t risen enough to compensate for higher fuel expenses.

The Organization of Petroleum Exporting Countries (OPEC), along with Russia, agreed to oil production cuts in early October, making it even more challenging for crude prices to fall and give consumers, including airlines, a break.

Here in the U.S., however, oil production continues to rise from pandemic lows and is nearing 2019 levels. Looking just at production from U.S. shale projects, which ordinarily require fracking to obtain oil, output has increased for seven straight months through November. This month, some 9.1 million barrels per day (MBPD) are expected to have been recovered from the ground. That’s only 200,000 BPD less than the all-time monthly high of 9.3 MBPD, set in November 2019, soon before the pandemic.  

US shale oil production close to fuel recovery

Jet fuel accounts for 25% to 35% of an airline’s total expenses, so lower fuel costs would be a nice windfall. According to Bloomberg, a new plane pays for itself in 12 years when jet fuel prices are lower than $4 per gallon, and as of last Friday, a gallon was $3.18.

On behalf of our team at U.S. Global Investors, Happy Thanksgiving! Have a safe and relaxing weekend surrounded by family, friends and loved ones!

Index Summary

  • The major market indices finished up/down/mixed/flat this week. The Dow Jones Industrial Average gained/lost x%. The S&P 500 Stock Index rose/fell x%, while the Nasdaq Composite climbed/fell x%. The Russell 2000 small capitalization index gained/lost x% this week.
  • The Hang Seng Composite gained/lost x% this week; while Taiwan was up/down x% and the KOSPI rose/fell x%.
  • The 10-year Treasury bond yield rose/fell x basis points to x%.

Airlines and Shipping

Strengths

  • The best performing airline stock for the week was xxxx, up xx.x%. China Eastern Airlines announced it would raise ceiling prices, namely no-discount airfare for economy-class for seven domestic routes, together with its wholly-owned subsidiary Shanghai Airlines. This followed the new regulation issued by the Civil Aviation Administration of China (CAAC) in December 2017, which allows Chinese airlines to raise the ceiling price for domestic routes by 10% in each flight season (twice a year), but cannot raise the ceiling price for the same route for three consecutive times.
  • ZTO Express reported adjusted net income attributable to shareholders of 1.9 billion renminbi (+64% year-over-year) in the third quarter, beating the Bloomberg consensus by 24%. Revenue came in 8.9 billion renminbi, up 21% yoy, driven by 12% yoy growth in parcel volume and a 10% yoy increase in prices.
  • Copa Airlines’ third-quarter earnings per share (EPS) of $2.91 exceeded consensus’ $2.74, and its earnings before interest and taxes (EBIT) margin of 17.8% also came in ahead of consensus’ 17.5%. The Panamanian carrier’s beat was driven by stronger non-fuel cost performance.
Copa's Stock is Trending Positively

Weaknesses

  • The worst performing airline stock for the week was xxxx, down xx.x. Star Bulk Carriers reported a third-quarter adjusted EPS of $1.33, slightly below consensus of $1.41. The results were driven by 3Q rates of $24,365 per day, which were in line with consensus of $24,494 per day. Fourth-quarter bookings came in at 66% at $22,772 per day per vessel, which is lower than consensus.
  • Due to the further deterioration of Chinese volume in Guangzhou, domestic passenger volume per seat capacity slightly declined to between 28% and 35% of 2019 levels, according to per Flight Master. Domestic passenger load factor (PLF) edged down to 64% from 66% in the prior week. Daily aircraft utilization for narrow-body aircraft slipped to 2.5 hours from 2.6 hours in the prior week.
  • The air cargo market is oversupplied, possibly by as much as 9.7% as demand has fallen 5.5% when compared with the prior year (January-August). Capacity growth through dedicated freighters and passenger-to-freighter conversions continues with no moderation of supply anticipated in the near term. Air cargo spot rates have tumbled by two thirds since December 2021.

Opportunities

  • In its annual survey, the Airports Council International (ACI) found that 86% of respondents are planning to travel by air in the year to come, the highest such score since the start of the pandemic. Further, the most recent Global Business Travel Association (GBTA) survey noted strong expectations of growth in business travel in 2023. Close to 80% of travel managers expect more business trips in 2023 compared to 2022. Among travel suppliers, 85% of respondents expect bookings by corporate clients to be higher or much higher in 2023. More than 65% of travel managers are optimistic that their company will conduct more internal and external travel.
  • The huge need for European natural gas in the wake of the invasion of Ukraine and a severe shortage of ship capacity has sent spot rates on liquid natural gas (LNG) tankers to record highs. Over the course of 2022, rates have increased to between $200,000 and $500,000 a day, and that may last for a few years, participants in a panel debate at the Marine Money conference in New York said on Thursday.
  • Copa’s revenue strength is coming mostly from leisure, but management said that there has been a recent uptick in corporate demand, currently at 75% of 2019 levels, with business now representing 25% of total revenues. On the fleet side, the company expects to receive 13 aircraft next year and has already secured financing for seven of them. Copa will discuss the restoration of dividend payments in the next board meeting, and it highlighted that it has been active on buybacks, with an active repurchase program of $200 million.

Threats

  • Capacity in the first fiscal quarter of 2023 has been noticeably reduced for Spirit Airlines (-4.0%) and Allegiant Air (-1.7%). Spirit is adjusting its early 2023 network out of Florida by reducing frequencies to Fort Lauderdale, Tampa and Fort Meyers, as well as Philadelphia and Hartford. This is partially offset by additions to Las Vegas, Atlanta and Detroit. Allegiant’s reductions include Las Vegas, Asheville / Hendersonville, Phoenix and Punta Gorda, with a large addition to Nashville.
  • According to Bank of America, Zim Integrated Shipping Services lowered its 2022 EBITDA (earnings before interest, taxes, depreciation and amortization) guidance by 6%, to between $7.4 billion and $7.7 billion. This decision is driven by a steeper-than-expected decline in freight rates, contract rates being renegotiated lower and weak demand. Zim notes that its contract rates were set above other liners as they were negotiated later in the season, when spot rates were higher.
  • According to J.P Morgan, the environment for aviation in Latin America remains challenging. Oil price increases, high inflation, elevated interest rates and devaluing domestic currencies have been pressuring Latin American carriers, despite record top line trends during the third quarter. Airlines are facing cost increases especially on the fuel consumption side, though demand outlook remains solid for the near term.

Emerging Markets

Energy and Natural Resources

Luxury Goods

Strengths

  • One after another, luxury goods companies have reported bumper sales and profits despite inflation, as the world’s wealthy enjoy a “roaring 20s” age of decadence similar to the boom in the postwar period a century ago, writes The Guardian. This week, the company behind Veuve Clicquot and Moet & Chandon said it was “running out of stock on our best champagnes,” as it struggles to meet pent-up demand as parties take off following the full easing of Covid restrictions. In addition, companies like Burberry reported an 11% increase in sales in the three months ended September, and Kering reported a 14% increase in its latest third-quarter sales.
  • Rolex, the biggest Swiss luxury watchmaker, is planning a major new production facility in Bulle, Switzerland, reports public broadcaster RTS (Radio Television of Serbia) and Bloomberg. Rolex could invest 1 billion Swiss francs in the manufacturing operation, creating about 2,000 new jobs. The facility would aim to begin operations in 2029.
  • xxxxx, was the best-performing S&P Global Luxury stock gaining xxxx%.

Weaknesses

  • Due to recent Covid outbreaks in China, luxury car brands are offering up to 20% price discounts. One of them is Mercedes-Benz, which is offering a price cut of up to 130,000 yuan ($18,172) on its high-end models, and at the same time, Audi and BMW have cut the prices by 110,000 ($15,376) and 80,000 yuan ($11,182), respectively. The decline in sales in the third quarter resulted from lower consumer demand; last year, it was because of the auto chip shortage and the high market prices.
  • The Service PMI Index, one of the most important leading indicators of the U.S., decreased in November, coming in at 46.1 vs. 47.8 expected. It represents a stronger-than-expected contraction in North American services activity, pointing to economic slowdown.
  • xxxxx, was the worst-performing S&P Global Luxury stock losing xxxx%.

Opportunities

  • According to an article from Vogue Business, fashion had a limited impact on negotiations at this year’s UN Climate Change Conference (COP27). This makes sense, however, as higher priority items such as the War in Ukraine, protests in Iran and ongoing supply chain delays took precedence. LVMH kicked off the conference, though, by unveiling plans to work with King Charles III’s Circular Bioeconomy Alliance to build a regenerative agroforestry system. This comes with hopes of coupling cotton production with biodiversity restoration in Africa. The company’s environmental director said this builds on the group’s work implementing regenerative agriculture in its Turkish supply chain.
  • According to a Business of Fashion (BoF) report, Gucci is the favorite luxury brand, while Nike is the number one sportswear brand for Gen Z consumers (those born between 1997 and 2010). This particular group of consumers represents 25% of the world´s population and has a purchasing power of about $360 billion, according to Bof. Despite being an important target market for luxury brands, Hen Z presents significant marketing challenges since they are digital natives. Gucci is the only luxury brand in the top 10 for this group of buyers because it has offered different experiences, such as providing NFTs and virtual spaces on Roblox (a leading gaming platform).
what are Genzs favorite fashion brands at the moment
  • Luxury brands are looking for different ways and scenarios to reach a new audience and expand their client base, reaching into sports events and targeting sport teams as new clients. One good example of this strategy is the presence of Louis Vuitton and Hublot at the FIFA World Cup, the world´s largest sporting event that is taking place in Qatar. Louis Vuitton launched the campaign “Victory is a State of Mine,” featuring Lionel Messi and Cristiano Ronaldo. Hublot is the official timekeeper for the tournament, reports Jing Daily from China.

Threats

  • Based on a new report developed in partnership with Business of Fashion and eBay, which analyzes luxury customer behavior, shoppers now see luxury brands as a currency because they believe their luxury purchases will increase in value over time. According to the report, 62% of luxury shoppers have sold luxury accessories for a profit. E-commerce pioneers like eBay take an essential role in this secondary market, affecting the sales in the physical stores which the luxury brands target to offer customers a memorable experience.
  • Leading luxury brands such as LVMH, Hermès, Swatch Groups, Richemont, Burberry, Gucci and Salvatore Ferragamo, have expressed concerns related to the potential contraction of the luxury Chinese market due to growing number of Covid cases. The latest Covid outbreak in China could result in the government imposing more restrictive measures to bring the outbreak under control.
  • According to Bloomberg, the ISM Manufacturing PMI for the U.S. is expected to decrease from 50.2 in the previous month to 49.8 in November. It could represent a contraction in the general state of the economy, including in the luxury goods industry. The United States is one of the leading luxury goods markets worldwide.

Blockchain and Digital Currencies

Strengths

  • Of the cryptocurrencies tracked by CoinMarketCap, the best performer for the week was Litecoin, rising 35.76%.
  • Binance CEO Changpeng Zhao, or “CZ,” and several deputies met with investors in Abu Dhabi last week to raise cash for a crypto industry recovery fund. CZ and his team held meetings with potential backers, including entities affiliated with UAE National Security Adviser Sheikh Tahnoon bin Zayed, who oversees a large financial empire, according to an article published by Bloomberg. 
  • Crypto markets have steadied as Bitcoin climbed for a second day, trading back above $16,000. Ark Invest’s Cathie Wood is sticking to her bullish forecast of $1 million Bitcoin by 2030, writes Bloomberg.

Weaknesses

  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week was Chiiliz, down 20.57%.
  • Cascading crypto blowups have only exacerbated problems for Grayscale’s $10.5 billion Bitcoin Fund. The Grayscale Bitcoin Trust closed a record 45% below the value of its underlying coins on Friday, according to Bloomberg data, and shares fell another 5% on Monday. The dislocation has widened dramatically in recent weeks as GBTC, which can’t redeem shares unlike traditional ETFs, has fallen to a greater degree than Bitcoin itself.
GBTCPrice Trades at a discount Relative to its underlying bitcoin
  • New York Governor Kathy Hochul has signed one of the most restrictive laws in the U.S. on regulating cryptocurrency mining, becoming the first state to impose such a ban. The bill triggers a two-year moratorium on new permits for crypto mining companies that are powered by fossil fuels.

Opportunities

  • Wall Street’s waning conviction in Coinbase Global has done little to deter Cathie Wood. Instead, she’s been scooping up shares of the struggling cryptocurrency exchange in the wake of the collapse of Sam Bankman-Fried’s FTX. Wood’s Ark Investment Management funds have bought more than 1.3 million shares of Coinbase since the start of November, worth about $56 million. 
  • The Wild West days of crypto are back as the large trading houses that once thrived on arbitraging price gaps pull back in the wake of FTX’s collapse. That’s opening up profitable opportunities for anyone who still dares to trade. The gap between the funding rates of identical Bitcoin futures on Binance and OKX, for instance, has been as wide as an annualized 101 percentage points, writes Bloomberg. 
  • Crypto billionaire Mike Novogratz said the “crisis of confidence” in the digital asset world will drive more cryptocurrency users to seek out institutional players like Fidelity Investments. “The big winners in this are going to be people like Fidelity who have just come out with their crypto product,” Novogratz commented. 

Threats

  • Bitcoin dipped firmly below $16,000 as crypto markets dealt with the FTX shockwaves. The bearish price action also comes in the wake of risk-off trading in the stock market. The global crypto market, which was as high as $3 trillion in November 2021, stood at only $790.3 billion, according to CoinMarketCap data. With increased downward pressure in cryptos, liquidity on centralized exchanges appeared to have also taken a nosedive. 
  • Exchange-issued crypto tokens such as bankrupt FTX Group’s FTT can pose “extreme” risk when accepted by their issuers as collateral, Bank of England Deputy Governor Sir Jon Cunliffe said. Cunliffe said the volatility of unbacked crypto assets like exchange tokens makes them vulnerable to runs, exacerbating their price swings, according to an article published by Bloomberg. 
  • In a conference call on Tuesday, top partners at the powerful venture capital firm Sequoia Capital apologized to investors by backing FTX, a pair of bankrupt cryptocurrency exchanged that had allegedly been mismanaged by Sam Bankman-Fried.

Gold Market

Date Event Survey Actual– Prior
Nov-23 Durable Goods Orders 0.4% 1.0% 0.4%
Nov-23 Initial Jobless Claims 225k 240k 223k
Nov-23 New Home Sales 570k 632k 588k
Nov-28 Hong Kong Exports YoY -9.1%
Nov-29 Germany CPI YoY 10.4% 10.4%
Nov-29 Conf. Board Consumer Confidence 100.0 102.5
Nov-30 Eurozone CPI Core YoY 5.0% 5.0%
Nov-30 ADP Employment Change 200k 239k
Nov-30 GDP Annualized QoQ 2.8% 2.6%
Nov-30 Caixin China PMI Mfg 48.9 49.2
Dec-1 Initial Jobless Claims 233k 240k
Dec-1 ISM Manufacturing 49.8 50.2
Dec-2 Change in Nonfarm Payrolls 200k 261k

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