Airline Stocks Fly High Despite Boeing MAX Mess

Lord knows when the grounded Boeing 747 MAX will return to service. But is that weighing on the airlines’ stocks? Nope.

They’ve taken flight over the past 12 months, with carrier stock prices rising 9.1%, using the US Global JETS exchange-traded fund as a gauge. Sure, that trails the S&P 500 (up 25.8%), but the broad-stock index is driven by glamorous tech stocks, and airlines aren’t that. Individual companies’ performances vary, of course. Stock in Delta Air Lines, the largest by revenue, is ahead 22%.

Yes, there may be some impact on profitability, but a still-strong economy and a truce in the US-China trade war are tail winds for the airlines. As Raymond James analyst Savanthi Syth put it in a recent report, “The potential short-term supply shock from the return to service (RTS) of the Boeing MAX fleet is likely to weigh on 2020 yields, but we believe the pressure is overestimated.”

The economy has provided a solid base of passenger demand. “Heading into 2020, both leisure and business demand appear healthy,” she wrote. She noted that January will be “an important proof point as corporate travel budgets are set for the year ahead.”

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The biggest loser in the MAX imbroglio, certainly, is plane maker Boeing, which thus far has lost more than $10 billion in revenue and has seen its CEO ousted. The narrow-body MAX was grounded by authorities all over the world in March, following two deadly crashes that killed 346 in Indonesia and Ethiopia. The company is scrambling to fix software and other glitches linked to the disasters.

Syth’s report emphasized the economy’s health as a spur for air travel demand. Despite a modest deceleration expected in the US economy, from 2.4% estimated growth in 2019 to 2.1% this year, seats are full.

In response to the MAX problem, airlines have shrunk their flight schedules and have pulled out of markets that were marginal for them. Southwest Airlines, a large user of MAX jets, has hastened its exit from Newark Liberty International Airport, where it didn’t do enough business.

The downside for the industry is that labor costs, especially those of pilots, are up, which could temper airlines’ results.

Once the MAX returns to service, as most observers expect the plane will, it should ease any concerns. The biggest hurdle then will be getting passengers to fly in the controversial aircraft.

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Tags: airlines, Boeing, Boeing 737 MAX, Delta Air Lines, flight schedules, Raymond James, Southwest Airlines, Stocks

The Pension Benefit Guaranty Corporation (PBGC) has approved a facilitated merger of two New York pension funds to help them stave off insolvency. It is the first time the PBGC has used its authority under the Multiemployer Pension Reform Act of 2014 (MPRA) to help two plans merge.

The PBGC said it will provide financial assistance to help the merger of Poughkeepsie, New York-based Laborers International Union of North America 1000 Pension Fund with the Laborers Local 235 Pension Fund of Elmsford, New York. Beginning this month the PBGC will provide three annual installments of $8.9 million to bolster the merged plan. PGBC is the lifeboat for struggling pension funds.

“PBGC’s mission is to protect the retirement security of workers and retirees in defined benefit plans and helping plans merge is one way we can do that,” PBGC Director Gordon Hartogensis said in a statement. “Through this facilitated merger, we are preventing a failing plan from going broke and preserving benefits in a financially responsible way.”

The Local 235 Plan, which covers more than 1,100 participants, is a so-called “green zone” plan, which means it has a funding ratio greater than 80%. Yellow zone plans have a funding ratio between 65% and 79%, and red zone plans are less than 65% funded. The PBGC said the merger will protect the more than 400 participants of the Local 1000 Plan, which was projected to become insolvent in 2026, without affecting participants and beneficiaries of the Local 235 Plan.

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Under MPRA, PBGC has the authority to facilitate plan mergers under certain conditions, including when one or more of the plans involved is projected to become insolvent within 20 years. Plans may apply to PBGC for financial assistance to facilitate a merger if the assistance does not impair the agency’s ability to meet its existing financial assistance obligations to other multiemployer plans. The PBGC itself is in financial trouble and has said that it expects its insurance program for multiemployer pension plans to run out of money within five years.

The PBGC said, however, that it will not be hurt financially by facilitating the merger of the two New York plans. It said that the merger reduces its expected long-term loss with respect to the Local 1000 Plan. Providing financial assistance to the merged plan will not impair the agency’s ability to meet its existing financial assistance obligations to other multiemployer plans.