February 2020 Market Recap

Strengths

• United Airlines is buying the Westwind School of Aeronautics, a flight training school in Phoenix, to help increase the supply of future pilots. The program is expected to train pilots for United Express regional carriers, which have struggled to fill jobs known for challenging schedules and entry-level pay, reports Bloomberg. The airline is also exploring ways to boost financing programs for aviators’ education. United anticipates 300 students will graduate in 2021.
• Airbus unveiled a curvaceous aircraft design at the Singapore Airshow that blends the wing and body, a design feature that could cut carbon emissions by 20 percent, reports Reuters. “Blended wing body” aircraft produce less aerodynamic drag and are more efficient to fly. Airbus has been performing test flights at a secret location since last year. Jean-Brice Dumont, executive vice president of engineering at Airbus, told reporters at the show: “We need these disruptive technologies to meet our environmental challenge. It is the next generation of aircraft; we are studying an option.”
• The Seamless Air Alliance, a nonprofit group of 30 companies including Airbus and Delta, says that its new technology infrastructure will make in-flight connectivity systems modular and hopes to introduce a global standard that will improve in-flight Wi-Fi. Currently, airlines only have the equipment of their chosen internet service provider. A new universal standard of being able to switch between providers would create a smooth experience for customers and save billions in the long run.

Weaknesses

• The International Air Transport Association (IATA) warned that the airline industry expects its first annual decline in global passenger demand in 11 years due to the impact of thousands of cancelled flights. Passenger demand is forecast to drop by 0.6 percent in 2020, compared with a December estimate of 4.1 percent growth for the year. Bloomberg reports that the global health crisis will shave around $30 billion from revenue. Several airlines have issued concerns of falling revenue, with Asian airlines expecting the biggest hit.
• On February 5, Pegasus Airlines flight 2193 crashed upon landing at Istanbul’s Sabiha Gokcen Airport. Three people were killed in the accident and the other 180 people on board were injured after the aircraft broke into three pieces. In the midst of bad weather, the plane failed to come to a stop, overshooting the runway and plunging 20 meters down an embankment. The aircraft was a Boeing 737-800, which has a strong safety record, and predates the grounded 737 MAX. Possible causes of the accident include pilot error, poor working conditions of the runway, bad weather and Pegasus’ security protocols.
• Boeing said that returning the 787 MAX jets to service will take several quarters. Randy Tinseth, Boeing’s vice president of marketing, said in an interview that the company will first ensure the 400 planes with customers and the 300 more stored in factories are flying again before ramping up production, reports Bloomberg.

Opportunities

• JetBlue founder David Neeleman has a new airline called Breeze Airways that aims to fly routes that aren’t currently served, having already identified 500 potential routes. Neeleman said “we’ll go to larger cities, but from cities that don’t have any service. I don’t think we’re going to fly a single route that anybody is flying on. There’s no reason to fly places that already have competition.”  Breeze will have a similar model to other low-cost carriers and will only fly two models of planes.
• Boeing said that airlines in Southeast Asia will need 4,500 new aircraft over the next 20 years to meet growing demand from the region’s middle class, reports Bloomberg. The manufacturing giant said that expected new orders are worth $710 billion at the Singapore Airshow. Growth is driven by carriers in Vietnam, Thailand and Indonesia. Boeing announced some positive news in February: it received its first order of 2020. Japan’s ANA Holdings Inc. confirmed that it plans to take 20 more 787 Dreamliner wide-body jets.
• A new trend is emerging in carriers flying longer distances on smaller planes. Bloomberg reports that China Aircraft Leasing Group Holdings is considering ordering long-range jets from the Airbus A320neo aircraft line. Airbus’ A321XLR is a long-range version of the A320 narrow body that already has 450 orders and commitments, challenging Boeing’s 737 MAX model.

Threats

• The coronavirus continues to negatively impact the global airline industry. Carriers around the world have cancelled more routes as the virus spreads further and travelers fear flying. Notably, United withdrew its 2020 profit forecast, citing uncertainty from the virus. Lufthansa has frozen hiring. Air Cathway said that 25,000 of its employees have taken unpaid leave – around 75 percent of its workforce. One of the harder hit stocks is Air Canada, which has lost $3 billion in market value from January 13 to February 25. Air Canada was the top performing airline stock in 2019, rising 87 percent on plans to boost its global presence. According to the Bloomberg World Airlines Index, the stock is now the worst so far in 2020, down 28 percent as of February 25.

• Airbus admitted to illegally trying to sway plane sales to discount carrier AirAsia Bhd and agreed to a $4 billion bribery settlement, reports Bloomberg News. Tony Fernandes, who built AirAsia, was one Airbus’ largest customers and made headlines by announcing big deals. This corruption probe had been going on for four years before settling in February. As a part of the deal, Fernandes will step away as CEO for two months while the Malaysian government investigates.
• Interjet, operated by ABC Aerolineas SA, is worrying investors after grounding four of its Airbus SE planes. The company says the planes are undergoing major maintenance and some speculate that those planes are actually being used for parts to keep other aircraft in operation, reports Bloomberg. The carrier is under financial stress and said in a court filing that its accumulated losses over the year could be considered a technical bankruptcy.

Strengths

• As of Wednesday February 26, gold-backed ETFs saw 25 consecutive days of inflows and rose to the highest level ever of 2,624.7 tons. Citigroup continues to update its bullish forecast for gold, reports CNBC. The firm said in a note that it believes market jitters will prompt invests to flee to safe haven assets, which could push gold prices to $1,700 an ounce in the next six to 12 months and $2,000 in the next 12 to 24 months. Ed Morse, lead analyst of the report, says gold should remain “resilient during ongoing risk market rallies but a better hedge during sell-offs and volatility spikes.”

• Even though gold jewelry buying is down in India, the world’s second largest consumer, gold exchange-traded funds (ETFs) are gaining popularity, reports Bloomberg. The Association of Mutual Funds in India writes that Indians invested the most in gold ETFs in more than seven years in the month of January. Total assets managed by the 11 funds available rose to $870 million, which is 31 percent higher than a year earlier. However, that figure is still half of the all-time high reached in January 2013. Demand for physical gold in the country has fallen in recent months due to higher prices.
• Several miners announced strong earnings for the quarter ended December 31, 2019. Kirkland Lake Gold reported record production of 279,742 ounces and record adjusted net earnings of $185.3 million in the fourth quarter. Kirkland CEO said the company plans on doubling the quarterly dividend in the second quarter of 2020, reports Kitco News. Newmont Corp. reported that its fourth quarter adjusted net profit nearly doubled from the same time a year ago to $410 million. This increase was largely due to the acquired Goldcorp assets and higher gold prices. First Majestic Silver reported that it produced a record 25.6 million silver ounces last year and hit record revenues of $363.9 million, up 21 percent from 2018. Lastly, Sibanye-Stillwater reported an 80 percent increase in full year earnings. The miner said strikes disrupted operations in the first half of 2019, but rebounded in the second half of the year due to higher metal prices.

Weaknesses

• After surging most of the month, gold joined the bloodshed of the stock market and saw its biggest one-week selloff since 2013 on February 28. Investors were selling the metal to cover margin calls and some was profit taking. Bloomberg writes that during the later phases of a selloff, gold has generally recovered and outperformed, but in the early stages it got thrown out.
• According to a report by law firm Bryan Cave Leighton Paisner, private equity investments in mining fell to $500 million in 2019, down from $2 billion the year prior – a drop of 75 percent. The firm said private equity is now focused on raising additional funds for existing investments rather than looking for new deals.
• Bloomberg reports that a Berlin court convicted three men of stealing a 100-kilogram solid gold coin worth $4 million in 2017. The coin is called the “Big Maple Leaf” and was stolen from the Berlin Bode Museum. It was issued by the Royal Canadian Mint in 2007 and was the biggest gold coin at the time – as big as a car tire. Police have not found the coin and assume it was cut into pieces for selling in smaller parts.

Opportunities

• Bloomberg reports that AngloGold Ashanti Ltd. is moving away from South Africa and instead toward the Americas. The world’s third largest gold producer is looking at projects in Colombia and Nevada, according to CEO Kelvin Dushnisky, as a way to bring new, longer life and lower-cost operations. AngloGold has just one mine left in South Africa and is looking for a buyer.
• The Russian government is looking at giving $1 billion in funding from the National Well-Being Fund to help develop the Arctic Palladium project in Siberia, reports Interfax. The project is a joint venture of Norilsk Nickel and Russia Platinum. This is part of Russia’s plan to be the world’s top platinum metals producer, reports Bloomberg. Russia’s biggest gold miner, Polyus PJSC, is focusing on smaller projects and cutting its debt ratio before starting work on Siberia’s Sukhoi Log deposit, which accounts for more than a quarter of Russian gold reserves.
• Egypt is hoping for a gold rush as it eases restrictions for mining companies. Bloomberg reports that mining companies have long complained that the country, whose mineral wealth is largely underexplored, has a system of royalties and profit-sharing agreements that make it hard to operate. In January, Egypt dropped the requirement that miners form joint ventures with the government and limited levies. Aton Resources Inc. obtained mining rights in the country last week, which is the first since Centamin Plc achieved rights more than 10 years ago.

Threats

• Due to severe power cuts, production by South African manufacturers fell the most in over five years in December. Statistics South Africa data shows that manufacturing output fell 5.9 percent from a year earlier. The country’s power cuts continue to hurt the economy with unemployment remaining at the highest level in at least 11 years. Harmony Gold fell after the gold producer reported first half results where production profit was 16 percent below the market estimate.
• The spread of the coronavirus continues to hit Chinese demand for jewelry. The death toll from the outbreak is now above 3,000 people and shoppers continue to stay at home as much as possible to avoid the virus. The economic impact from the global health emergency could very well send Chinese jewelry sales plummeting for the year.
• Goldman Sachs Group Inc. economists said that they now expect the global health concerns to inflict a “short-lived global contraction” on the world economy. They also think it will force the Fed to cut interest rates in the first half of this year as a result.