Policymakers around the world are grappling with the question of how to save their airline industries as travel grinds to a halt in the face of the novel coronavirus pandemic.
While there is consensus that some kind of assistance will be required in Canada, where Air Canada has already announced a temporary layoff of workers and both it and WestJet have grounded international routes, the form that help will take has not yet been announced.
This week, Prime Minister Justin Trudeau said the Canada Account — a financial vehicle managed by Export Development Canada that makes large loans and guarantees backed directly by the federal government — could be tapped to support the more “vulnerable” sectors battling economic impacts of the COVID-19 pandemic, without mentioning airlines directly.
While the Canada Account was instrumental in the 2009 auto sector bailout during the financial crisis, Karl Moore, an associate professor at McGill University’s Desautels Faculty of Management, said it’s not clear that the government would tap it this time.
There are key differences between the automobile and airline industries, he said, which include their capital structure and the composition of the workforce. The performance of industry players is also far less inter-dependent than in the North American auto industry.
A more likely scenario for assistance would mirror what is already under way in other countries such as the United States and New Zealand, industry watchers say, where special government loans are being negotiated in exchange for caps on executive pay and restrictions around returning cash to shareholders through dividends and share buybacks.
Such a move would not be without precedent in Canada. In 2013, the federal government gave relief and extensions to allow Air Canada to manage a pension deficit that had ballooned to over $4 billion. In exchange, the airline had to agree to strict limits on executive pay, dividends and stock buybacks.
Another reason a direct repeat of the auto bailout may be unlikely is that the lifeline thrown to the Canadian divisions of U.S. automakers by Stephen Harper’s Conservative government at the height of the financial crisis wound up being politically controversial.
The taxpayer burden was a thorny issue for years and in 2018, a $2.6 billion loan (including interest) made to Chrysler was quietly written off by the subsequent Liberal government.
Meanwhile, the auto bailout ultimately did little to maintain the industry in Canada. General Motors has now closed what was at one time an economy-sustaining operation in Oshawa, Ont.
At the time of the auto bailout, Canada was under pressure to act because the fortunes of the Canadian companies and U.S. operations of Ford, General Motors and Chrysler were closely tied, and huge aid packages were being extended to the sector by Canada’s biggest trading partner.
Though many air carriers are suffering now, their fortunes are far less connected. And Canada’s airlines are in relatively good financial shape, led by Air Canada, the largest player.
Fitch Ratings reported that Air Canada’s updated credit rating is at BB, and WestJet’s at BB-
Fitch Ratings issued an updated report on Air Canada’s credit Thursday, and while the outlook was changed to negative from stable in light of the pandemic, the rating itself — at BB — was unchanged.
The outlook was similarly revised for WestJet Airlines, and the credit rating also maintained by Fitch — at BB-, a notch below Air Canada’s.
One wild card industry watchers point to regarding WestJet is that the airline, which was initially launched as a low-cost alternative to Air Canada, was recently purchased by private equity firm Onex Corp. in a deal that just closed in December. Private equity purchases tend to be heavily leveraged, and one observer who spoke on condition he would not be identified because of work he does in the sector, said Onex might be tempted to step away from the airline at some point to cut its losses.
Even Fitch warned that none of the airlines is impervious to a prolonged downturn. If the impact of the pandemic hits airlines for longer than a couple of quarters, it could lead to a downgrade of the Canadian carriers’ credit, the ratings agency said.
Still, the rated Canadian airlines appear to be doing better than many of their international counterparts. On Friday, Moody’s Investors Service suggested global airline capacity could fall by up to 35 per cent in 2020 due to the pandemic, and that weaker carriers could be pushed into default.
Despite the relative strength of Canada’s major airlines, what happens in the United States could very well play into Ottawa decision, according to a veteran Bay Street lawyer who has had dealings with the industry and government in the past.
Air Canada’s decision to put some 5,000 employees on temporary layoff until at least April 30, a move publicized early Friday by their union, the Canadian Union of Public Employees (CUPE), could also prompt political action, driven by the Liberals’ desire to protect working Canadians, he said.
The situation in the United States looks dire, and the U.S. Senate was considering a rescue package Friday. Delta Air Lines Inc. had said it expects second-quarter revenue to decline by $10 billion, and United Airlines Holdings Inc. said it would begin shedding its workforce in step with an expected decline in its schedule if sufficient government aid is not announced by the end of this month.
American Airlines PLC, meanwhile, banded together with unions Friday to demand cash in addition to loans from the U.S. government — which could be converted at some point into equity stakes — to help protect their workforce.
McGill’s Moore considers it very unlikely that Canadian airlines will wind up in government hands, particularly Air Canada, a former Crown corporation has performed well recently after emerging from government ownership in the late 1980s.
“It’s one of the better run airlines in the world,” Moore said, adding that it makes sense to “leave it to private sector rather than bring (it) under the government remit.”
It makes sense to leave (Air Canada) to the private sector rather than bring it under government remitKarl Moore, associate professor, Desautels/McGill
If assistance comes to Canada’s airline industry, a rescue package can be expected to come with strings attached in whatever form it takes, at least for Air Canada.
The pension relief granted in 2013 marked a rare case in which the government stepped in to aid Canada’s largest airline, and, again, it was Stephen Harper’s government that did so. But that aid came with an intrusion into the company’s affairs that are usually left to executives and directors in the boardroom.
Other times when the airline could have used a helping hand, the government wasn’t there at all. In 2003, when the Liberals were in power, Air Canada’s business tumbled in the aftermath of the 9/11 terrorist attacks and the SARS health scare, and the carrier was forced to file for bankruptcy protection under the Canada Creditors Arrangement Act.
It emerged a stronger company, and industry watchers point out that it may well be able to weather the current crisis without a government bailout.
Nevertheless, the Air Transport Association of Canada, whose members include Porter Airlines as well as SunWing Airlines, said the expectation is that “any financial aid package for the transport industry would be made available to all carriers.”
“This is the only acceptable way to maintain a level playing field in such a difficult time,” John McKenna, the association’s chief executive, said in a letter to federal officials including the prime minister and finance minister Bill Morneau this week.
In the letter, he implored Ottawa to step in to ensure the domestic industry’s survival, insisting “government financial assistance is urgently needed to avert a crisis in the aviation industry.”
“The consequences of the crisis and of measures taken to contain the virus are having an immediate catastrophic economic impact on our industry,” McKenna wrote.
Ontario sees two new deaths as COVID-19 cases rise by 211 – Toronto Star
Ontario has another 211 confirmed cases of COVID-19, a jump of 18 per cent that includes a second worker at the Real Canadian Superstore in Oshawa and a Mississauga firefighter.
There have been two more deaths, bringing the total to 21, according to Ministry of Health statistics released Sunday.
Loblaw said the Oshawa store on Gibb St. has been shuttered temporarily. It’s the same outlet that employed Ontario’s youngest COVID-19 fatality, 48-year-old Keith Saunders, who died Thursday.
“With the community spread of COVID-19, it’s unfortunate but inevitable that some stores will be affected,” said Catherine Thomas, senior director of external communication for the company.
“We’ve closed the store, brought in third-party sanitization experts, and worked closely with local public health to ensure we reopen safely and that colleagues who may have been directly exposed are not in the store.” The store reopened later Sunday morning.
Ontario has now recorded 1,355 cases of the new coronavirus, including the 21 deaths — mostly the vulnerable elderly — and eight cases that have been cleared since the outbreak began in late January.
The numbers are considerably higher than last weekend, when Ontario had just three deaths and 380 cases.
Across Canada, there have been 63 deaths and 5,866 cases, federal chief public health officer Dr. Theresa Tam told a news conference in Ottawa on Sunday.
She served an early warning that Canadians will have to be flexible with upcoming religious celebrations such as Easter and Ramadan, which “will need to be adapted” with physical distancing in place.
Mississauga Fire Chief Tim Beckett said the station where the affected firefighter worked has been closed temporarily and its territory covered by nearby firehouses.
“We’ve got extra decontamination processes,” he added, noting several firefighters who were in close contact are home in self-isolation.
The number of Ontario cases cleared — just eight — is artificially low because it does not reflect the number of people who have recovered but not been tested as priorities shift to the seriously ill, health-care workers, the elderly and First Nations.
A surge in case numbers from returning travellers who have caught COVID-19 and transmitted it to close contacts, as well as infections acquired in the community, has left public health units swamped.
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That’s why the exact cause of infection in about 40 per cent of Ontario cases has not yet been traced, let alone people they may have put at risk for the virus, provincial health officials say.
The federal government says community transmission now accounts for 65 per cent of cases, with travel declining to 35 per cent.
Russia says OPEC+ deal revival possible if other countries join in – RT
A new agreement to stabilize oil markets is possible if more nations support the initiative, according to the head of the Russian Direct Investment Fund (RDIF), Kirill Dmitriev.
In an interview to Reuters, the sovereign wealth fund chief said that coronavirus epidemic has become a “perfect storm” to trigger a new global financial crisis that will result in recession. To offset the economic fallout of the outbreak, countries should unite, including in imposing new output curbs to end the oil market turbulence.
Russia, which is not a member of the the Organization of the Petroleum Exporting Countries (OPEC), was one of the key supporters of the production cut pact with the alliance, Dmitriev stressed, adding that the deal brought more than 10 trillion rubles (nearly $127 billion) to the country’s budget. Earlier this month Moscow and the OPEC kingpin, Riyadh, failed to agree on a new deal, sending oil prices to multi-year lows.
“It was not Russia that made decision to boost output and withdraw from the OPEC+, but we [the RDIF] believe that we can back to the deal,” Dmitriev said, adding that Russia maintains dialogue with Saudi Arabia, as well as with some other nations.
“We see that if the number of OPEC+ members will increase and other countries will join there is a possibility of a joint agreement to balance oil markets,” he added without elaborating which countries could join the deal.
Meanwhile Saudi Arabia said it had no contact over the possibility of a new agreement on oil production caps, as well as enlargement of the deal, at least at the energy ministers level.
Oil prices have been tumbling since the beginning of the month as the failure of Vienna talks was taken as the beginning of a full-scale oil price war — the claim that was later denied by Moscow. Both benchmark brands, WTI and Brent, were trading lower on Friday, ending the week at $21.51 per barrel and $27.95 per barrel respectively.
For more stories on economy & finance visit RT’s business section
Stock Market Crash 2020: What to Buy Right Now – The Motley Fool Canada
The coronavirus (COVID-19) blindsided many investors as it paved the way for the stock market crash 2020, killing the bull shortly after its 11th birthday.
At first, many thought the virus would be contained in China. But when the virus spread across the entire globe, causing a new wave of exponential spread, the stock market crumbled like a paper bag, bringing down safe-haven assets with it. There was a rush for cash, and not even bonds, gold, or REITs (traditionally safe alternative assets) were safe to hide in.
Stock market crash 2020: never exhaust your cash reserves because liquidity could dry up again!
Many of the folks who were 100% equities got into trouble when liquidity dried up across the board. So, it’s always advisable to always have an emergency fund, so you don’t have to decide between paying your rent for the month and hanging onto your holdings before a rebound.
Don’t give yourself an opportunity to sell at a loss. If you do, you could miss out on the 20% three-day rally like the one we had last week. While the sudden surge may prove to be a pronounced dead cat’s bounce, the waters are relatively safe to get back in if you’re like Warren Buffett and have a hoard of cash sitting around.
The US$2 trillion stimulus package could mark the bottom of the stock market crash of 2020, but of course, only time will tell, as the coronavirus continues its rapid spread across the world.
In any case, investors should look to blue-chip dividend stocks if they’re cautiously optimistic and don’t want to lose their shirt if it turns out we’re nowhere close to hitting a market bottom.
Stock market crash 2020: Cheap dividend stocks are a great way to dip your toe into the rough market waters
Consider stocks with a large margin of safety and safe dividends that can pay you a handsome amount while you wait for the stock market to recover. The Big Six like Royal Bank of Canada (TSX:RY)(NYSE:RY) may be among the best of bargains to consider at this juncture.
Royal Bank currently sports a 5% yield, which, while smaller than some of its more battered peers is still rich given the strength and resilience that the bank exhibited amid the Canadian credit downturn.
Royal Bank also was one of the first Canadian banks to come roaring back after the Financial Crisis hit, and as the coronavirus crisis inevitably falls into the rear-view mirror, Royal Bank will be one of the first Canadian stocks to make a return to its all-time highs.
Royal Bank of Canada: A king among banks
As far as ROE is concerned, Royal Bank is considered royalty. The bank’s capital markets and wealth management businesses were firing on all cylinders for the first quarter. And with impressive volume growth in the Canadian banking business, it’s clear that Royal Bank remains a king among Canada’s banking scene even with the seemingly overwhelming macro headwinds.
Despite the bank’s continued outperformance relative to its peers group, it won’t be immune from the devastating impact of the coronavirus. Management cited it had limited exposure to impacted regions, but in the end, the looming global economic recession will stand to major drag results for the year.
In any case, a new bull will eventually come charging out of the gate and Royal Bank will likely lead the upward charge. I’d buy Royal Bank while it’s down over 21%.
While you could grab a steeper bargain with most other stocks out there, I’d argue that buying Royal Bank today is akin to picking up loose quarters that have been dropped in a safe zone and not loonies that are sitting before a steamroller!
Stay hungry. Stay Foolish.
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