Airline bankruptcies are inevitable at this point’: Eagle Point Credit Management

Tom Majewski, Eagle Point Managing Partner, joined Yahoo Finance's On The Move to discuss the outlook for the aviation and hospitality sectors amid COVID-19.

Video Transcript

ADAM SHAPIRO: Another industry that requires people to wear masks, the airline industry. Want to talked about winners and losers not only in the airline industry but in travel-related industries as well as in hospitality. And to help us do that, we invite into the program Tom Majewski, who is Eagle Point managing partner joining us from Greenwich, Connecticut.

Good to have you here. Before we get into winners and losers, help us understand one thing that seems at first odd. The airlines are using their frequent flyer mileage programs as an asset with which they're leveraging the borrowing. United's done it. Delta's done it. Why would that be an asset as opposed to a liability? Because if I claim those miles, they're not getting cash for it. Tom, I think you need to un-mute yourself.

TOM MAJEWSKI: There we go, Adam. Can you hear me better now?

ADAM SHAPIRO: Yes.

TOM MAJEWSKI: Great, thank you. Really good morning. And thank you for having me. A really good question.

The frequent flyer businesses within airlines, certainly United's mileage plus platform, of Delta's Sky Miles program, those are loyalty programs. And they create both revenue and do incur expense. They generate a lot of revenue when you use your Mileage Plus credit card or your Delta credit card or when you fly, and the airlines actually contribute money to those separate operating divisions when customers accrue miles when they fly. There's lots of other promotions and ways to earn miles. So they generate a fair bit of revenue. And they sell those miles to vendors like Chase and American Express at reasonably high rates, higher than the cost it takes what they have to spend when they redeem those miles for flights or other benefits.

So they're very, very unique businesses, in that they generate revenue from a lot of different sources. And they have a fairly captive audience, in that people typically stick with one or two airlines and build up their points. So they have a very loyal customer base, which makes it very attractive.

JULIE HYMAN: Tom, it's Julie here. So you look at the credit side of this, so presumably you're paying a lot of attention to these airlines' ability to remain solvent right now. Are these frequent flyer programs a valuable enough asset that that is going to mitigate some of that credit risk. And do you think we're going to see some bankruptcies at this time?

TOM MAJEWSKI: Unfortunately, we think bankruptcies in one or more airlines is probably inevitable at this point. The credit markets, which is a very good indicator to get a head start on the equity markets, in our view, really have differentiated secured assets like the recent loan that United took pledging its Mileage Plus program versus unsecured debt. For example, United unsecured debt is trading in the 70s today, yet the secured debt backed by the mileage program trades around par. So the market's saying there's meaningful uncertainty around what happens if you're an unsecured creditor. But you're probably going to be plenty good if you're pledged by that loyalty program.

Even if a company like United files bankruptcy, it would likely be a Chapter 11, not a chapter 7 where they go away. The successor operator would still very much want to have all of those valuable customer relationships.

ADAM SHAPIRO: Tom, I know that you've listed among the losers right now United and American airlines. I'm curious who your winners are. But would you be willing to go out on a limb to tell us which airline you think would be the most likely to seek bankruptcy protection?

TOM MAJEWSKI: Sure, I'll let the markets actually guide us on this. Of the majors in the US, American one the market's saying its closest to filing. They've probably got the least liquidity of any of the majors. And their unsecured debt it's trading in the $0.40 and $0.50 on the dollar today, deeply distressed prices. While we certainly hope they make it, you can see a pretty clear path for them to end up in bankruptcy court.

On the other side of the equation, you look at an area like Delta. While they just reported a roughly $6 billion loss for the second quarter, they've got over 18 months of liquidity at their current run rate. They're burning about $25 million of cash a day, which is better than they expected but certainly not a long-term business strategy that anyone wants to follow. They have the best liquidity profile. And many consider it some of the some of the strongest assets.

In the hotel space, you mentioned hospitality earlier. There we also see some differences in winners and losers. Companies like Hilton, which despite very few people staying at hotels, still has an equity market cap of over $20 billion today. And it's first debt trades at the very high 90s today. Compare that to Extended Stay America, which is the company that's predicated on long term business trends and consultants who might go stay in a city for two weeks or a month and need a kitchen in their room, those people just aren't traveling today. And we think the leisure based traveler is going to be more likely to come back sooner than the business traveler.

ADAM SHAPIRO: All right, Tom Majewski, Eagle Point managing partner, thank you for joining us.