Bonds and loans backing US airlines led a potent debt rally after Iran and the US agreed to a two-week ceasefire, fueling expectations that the Strait of Hormuz will reopen to international shipping.
Tanker restrictions in the Middle East have caused a massive shortage of refined products like jet fuel, which accounts for 20-30% of an airline’s total operating expenses. Most US carriers have abandoned traditional fuel hedges that might have insulated them from recent volatility, and hedging is “not so easy to do,” according to George Schultze, managing member and founder of Schultze Asset Management. “If you don’t have a pretty clean balance sheet, it’s going to be hard to find counterparties that will take the other side of that trade because basically you have to have a giant derivative book on your balance sheet. In other words, you have to be creditworthy for a counterparty to allow you to put that hedge on, and lots of airlines don’t have that flexibility,” Schultze said.
Low-cost airlines are particularly vulnerable given their limited ability to offset rising expenses by cutting routes and raising ticket prices. Noting the “double whammy” of potentially lower revenue and higher fuel costs for a sustained period, Schultze said that “some of these airlines may just fail if oil prices stay up.”
As such, JetBlue was the biggest beneficiary in morning trading. The carrier’s $2 billion of loyalty-backed 9.875% senior notes due September 2031 surged 4.125 points higher, to a 98.25 context and a roughly 10.29% yield. Those had hit a new low with a 90 handle on March 20. JetBlue’s $744 million term loan B due August 2029 (S+475, 0.5% floor), which is also secured by the company’s TrueBlue Loyalty Program, jumped by two points from yesterday, to 91.5/94.5 today.
American Airlines is also fully exposed to price swings in aircraft fuel after the last of its hedging contracts expired late last year. The borrower’s $3 billion issue of loyalty-backed 5.75% 2029 bonds reclaimed a par handle after picking up a point this morning, while its $1.078 billion TLB due June 2029 (S+225, 0% floor) is up by 1.25 points from yesterday to 98/99 today. As well, its loyalty-backed $2.264 billion TLB due April 2028 (S+225, 0% floor) was marked at 99.375/100, up by around 0.5 points on the day, while the $993 million incremental TLB due May 2032 (S+275, 0% floor) gained 0.75 points, to 99.5/100.25.
American is the world’s largest carrier by the number of hubs served. Management has warned that fuel costs will add some $400 million to first-quarter expenses and could force higher ticket prices and affect profitability into the second quarter.
Meanwhile, executives at United Airlines said they are planning for a “worst-case scenario” where oil prices hit $175 a barrel and remain above $100 through the end of 2027. If realized, these prices would increase United’s annual fuel expenses by approximately $11 billion. The borrower’s busiest $1 billion issue of 5.375% senior notes due 2031 was up as much as 1.375 points this morning, at 100.375. Its loans remain rangebound.
Delta Air Lines, the first major carrier to report results since the start of the Middle East conflict, said today it will “meaningfully reduce” its near-term capacity growth plans as spiking fuel costs added $2 billion to its first-quarter expenses. That’s despite its proprietary refinery reducing fuel costs by over 2% per gallon and providing a projected $300 million benefit to second-quarter expenses. Delta is the only major US carrier to own an oil refinery. The SkyMiles IP-backed 4.75% senior notes due 2028 were most active of the Delta stack this morning, but those are largely illiquid and only eked out a quarter-point gain to change hands in a par context. Its loans were unmoved.
Despite the ceasefire, analysts warn that the situation remains extremely fragile and that energy market prices may remain elevated, with the risk of further shortages if the truce fails. Even if it holds, experts say it could take up to five months for the oil market to return to pre-conflict supply levels, with an estimated 10-13 million barrels per day stranded behind the Strait of Hormuz, and with at least 40 critical energy sites in the Gulf having suffered severe damage during the conflict.
Featured image by Ross Rappaport/Getty Images
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