Digital and cryptocurrencies have come a long way over the last decade. Could Bitcoin be the saving grace for struggling airlines?
If you are considering booking travel or signing up for a new credit card please click here. Both support LiveAndLetsFly.com.
If you haven’t followed us on Facebook or Instagram, add us today.
Tesla Made History, Money
Two weeks ago, Tesla announced that it had converted a substantial portion of its treasury to Bitcoin, the cryptocurrency. The day it was announced, the price of BTC jumped from just under $40,000 per coin to nearly $44,000. It hasn’t looked back since that point, exceeding $56,000 on Friday.
Due to the nature of Tesla operating as a publicly-traded company, the electric car manufacturer of California (soon Texas) could not disclose the move at the time it was made to comply with SEC regulations. Though the automaker announced it when the currency was at about $40,000, the purchase was actually made when the asset was priced at $25,000 per bitcoin.
The move has netted Tesla about $1.86bn in the last few months as the value of the digital currency has risen dramatically. For those curious, Tesla’s stock was trading at around 1700x earnings (a ridiculous ratio) and produced about $750 million in 2020 profit for car sales. Switching a portion of the company’s cash reserves has resulted in approximately 2.5 years of profit for the business in just a few weeks.
Tesla is not the first publicly-traded company to move assets into Bitcoin. Square announced a similar move at a lower level of $100 million. Square also sells cryptocurrencies in its Cash App. Even Chase has stated it will move some portion of JP Morgan investments into BTC and started its own cryptocurrency.
Lower Transaction Costs
The biggest advantage to adopting some portion of an airline’s financial system is allowing customers to pay with crypto. By allowing travelers to pay for flights with Bitcoin, carriers can lower their transaction costs over credit card processing fees which can reach 2-3% of a sale. For airlines that typically operate at a margin of 4-10%, saving those fees could add a substantial amount of value to their business.
For airlines to accept Bitcoin (or any other cryptocurrency) as a payment form to book flights, there will need to be more adoption from the public too, in order to have a real impact on the bottom line. It’s one thing to invest in hedge funds around crypto or allocate some level of your portfolio to it, it’s rather another to actually hold the currency in a digital wallet.
A dozen online travel agencies offer Bitcoin as a payment option which include flights and hotels in the US. Expedia has a page dedicated to the terms and conditions of selecting Bitcoin to pay for travel. What’s even more interesting to me, is that Expedia clearly has a preference for retaining any refunded tickets in BTC by refunding back airline tickets in dollars unless specifically demanded in Bitcoin.
As a source of revenue, despite lower ticketing costs by processing payments in Bitcoin rather than credit cards, Expedia charges customers an additional processing fee. While I find that insane, it could potentially help struggling airlines as a revenue source as acceptance of the currency grows and its usage.
As the asset class is adopted more widely, paying with Bitcoin will become an option for vendor payments too. When suppliers start accepting bitcoin payments, other transactional costs can be eliminated as well.
Airlines left billions trapped in Venezuela due to currency extraction regulations. China similarly has limited the amounts of funds that can be taken out of the country, trapping in-country revenue for global airlines. Bitcoin adoption would also help with stabilizing revenue from countries with volatile currencies, though a less volatile crypto might be needed for this purpose
Hedging Fuel, Hedging Currency, Why Not?
Pretending Bitcoin isn’t highly volatile is a fool’s errand. In the last week, the currency was up 18% leaving even Musk uneasy despite his relative good fortune with TSLA holdings and personal investments in the coin
But oil is volatile too. Certainly, it’s not as volatile as Bitcoin is currently but look at the swings in March of last year, or even in the last few weeks. Announcements with regard to the Keystone XL pipeline and supply restraints due to cold snaps in key states like Texas has sent the commodity into Bitcoin-level volatility. The commodity is up 8% on the week, 12% in the last 30 days and 25% since January 1st. Airlines that no longer hedge fuel and just pay the spot price absorbed that oil spike hit last week, how is that different if Bitcoin were to drop 10-15% in a week instead?
For struggling airlines, like American, putting the same amount (though a much smaller total percentage of treasury) as Tesla into Bitcoin would have transformed the carrier’s position in the market. Just the gains in the last week on $1.5 bn (18%) would have totalled more profit than the carrier had earned from flying during 2018.
Hindsight is 20/20 but most analysts believe the cryptocurrency is going to $100,000, some last week called for it to move to $500,000 per coin.
As other companies follow Square, PayPal, Chase, and Tesla’s lead, paying and receiving payments with virtually no transactional cost will save thin margin businesses like airlines billions of dollars. If the market trends continue as more companies adopt, it would be one of the best investments a carrier could make. By accepting Bitcoin, airlines could lower costs, charge for acceptance, and potentially grow their tresaury.
What do you think? Should airlines move some of their treasury to Bitcoin? Are cryptocurrencies too risky?
Making bets on speculative investments… what could possibly go wrong?
Don’t airlines already do this with oil? Is it any riskier?
Yes, but they need oil to run their fleets/business. They don’t need bitcoin. To say it another way, the price of oil impacts the cost of operations, while bitcoin does not.
Most US companies hedge a big portion of their foreign currency risk. They report in US dollars, so they hedge foreign currency risk to avoid having exchange rates impact their earnings. If they were to act in a similar way with bitcoin, they should hedge out any exposure they have to bitcoin.
Finally, aren’t airlines wards of the federal govt right now? And are the feds going to take loan payments in bitcoin? Are employees going to take salaries in bitcoin? Neither of those two stakeholders should want airlines to invest in bitcoin.
If an airline suffers big bitcoin losses there should absolutely be NO government bailouts. If they’re saying they need multiple government handouts to survive how can they explain that they can afford such risky, operations unrelated, risks?
Bitcoin prices can can go down, and they have before. Could the airlines ride out the swings without endangering their existence (or I guess doing another bankruptcy to save themselves)?
@Carl WV – Good point but I have a counter. Airlines received billions in bailouts for multi-billion losses. However, if they were to deposit the same amount as Tesla ($1.5bn) and the price fell precipitously, they would no doubt sell their position on the way down. It also wouldn’t go to zero. If the airlines had ONLY lost $1.5bn each, there wouldn’t have been a bail-out anyway. But what about the cash losses in Venezuela. That was more than twice the Tesla purchase. Those airlines just wrote it off and continued down the road. Does that mean they shouldn’t fly to foreign countries? China has severe limits as well (as I mentioned in the post) but the held capital would be substantially larger than the Venezuela cash – should airlines not fly to China?
There is an inherent risk in doing business at this level and while American Airlines chooses to no longer hedge, the only reason why Southwest isn’t Allegiant today is that they leaned heavily into fuel hedges that outlasted massive swings in fuel cost. By buying low, they were able to expand their operation with impunity at a time where others were struggling.
I have no problem with with airlines taking steps to hedge operational costs. Hedging related fuel costs make sense, I just see them going into bitcoin as an unrelated business, like if they decided to invest in orange juice or pork bellies.
As to them selling when bitcoin is on the way down would they miss the turn up and not chase the market? In a way it’s a hard topic to debate when everybody is so sure bitcoin will go up and up. I remember when people thought housing prices could never gone down. We know they did and what that led to (at least partly due to shady derivatives). Prices eventually bounced back, but many no longer had their homes anymore when it did. And many got out of the stock market and didn’t return for the ride up.
Personally I’d just like to see some 16% CD rates like in 1981.
Bitcoin isn’t a zero transaction cost, if you want the transaction to take place within 30m you need to pay about $10 per transaction so for a $400 transaction it is breakeven with credit card fees, even up to $1000 you’re looking at a 1% fee, comparable to debit cards. And what about adding something like southwest early bird after you book? You’d pay a $10 transaction fee for a $30 purchase?
The savings is minor relative to the cost of adding a new payment system that no one will actually use. Don’t believe me? Ask your friends if any of them have used Bitcoin to buy anything other than drugs in the past year. People don’t treat it as currency they treat it as an investment. Can you imagine if grocery store prices swung as much per day as Bitcoin prices?
And finally, you compare it to fuel. The difference is that airlines have to buy fuel or the planes don’t fly. If they could guarantee the same price of fuel forever most of them would (which is precisely why they hedge: they don’t want to deal with fluctuations in value). They have teams of people managing fuel cost risk and now they should do the same with Bitcoin? For what?
@Logan, thank you for your thoughtful and detailed comment. True, it’s not a zero-fee transfer, but if it operates as it does on Coinbase, I would have to imagine that instead of processing each transaction out of each wallet, Coinbase would move the funds immediately into their own wallet for Expedia, for example, and then settle everything at the end of the day. There might be a management cost associated with that, but it’s not going to be $10 every time someone adds checked luggage. Debit cards charge about 0.5% for processing so it would have to average far lower than that to make sense.
However, your example (individual transactions per consumer) ignores the broader opportunity with vendors. If American Airlines can get its vendors to convert to cryptocurrency then processing times and costs will shrink too.
When you speak to a wider use case, you might need new friends. You can use crypto in the Cash app as well as more broadly with Square to pay with whatever coin you choose. Fluctuations right now are a problem for normal daily use, however, some coins are more stable. If the JP Morgan Chase coin wasn’t traded on the open market but was available to Chase customers usage would improve, Chase would reduce risk down to near nothing (since they could see the accounts in real-time as it withdraws), and businesses that partner with Chase could cut out AMEX/Visa/Mastercard/Discover altogether.
In your last paragraph, you mention airlines “need” fuel or they don’t fly. They also don’t fly without cash. If adopted (not as an investment) there’s no faster way to move money as inexpensively in the world. Should they also have teams that focus on the cash in the business – they do, and they should. But let’s put that in simpler terms. Last year, American Airlines lost $9.5bn. Had they made the same move as Musk with the same amount of cash they’d have offset 15% of its loss last year in six weeks. That’s not sustainable, certainly, but to suggest that no one at American Airlines is managing money, cutting costs, or making financial investments is patently false. If not, it’s probably time to unload that stock.
Bitcoin is not a currency. People may think it is, but so far it really has not shown to be one or at least not a very good one. The reason people use dollars or any other currency is that they know tomorrow there dollar will be worth less so they have no problem parting with it. Bitcoin on the other hand has been going up up up. No one is handing over bitcoin to pay for almost anything unless it is an illegal transaction because tomorrow the bitcoin is worth more. Bitcoin maybe a store of wealth or an investment but not a currency.
Maybe today. Perhaps other cryptocurrencies could lead this charge. I was consulting a bank with lots of overseas transfers and I advised them to consider creating their own crypto but not releasing it on the open market (much like Chase later did) and using that to transfer Fiat from a foreign body across to US holdings. It could work the other way too.
If you were to cancel a refundable flight, would you get back the $US cost of the flight or the same bitcoin portion you paid?
I was also thinking of the NY bars for sale for 25 bitcoin.. Does the bitcoin price change everyday based on what bitcoin is doing or would a buyer now really be paying more (by $US value) with the recent bitcoin rise? I guess it’s a matter of whether there is really a bitcoin price or if the price is $US and you are just paying with bitcoin (using newest conversion rate at settlement).
I don’t object to airlines collecting payments in bitcoin, as they collect payments in foreign currencies. That being said, my expectation as a shareholder would be that they hedge out non-operational risks.
If AA had so much extra cash that it could invest in bitcoin, as a shareholder, I would ask why they didn’t dividend that money to shareholders, so they could make the decision on what is a suitable investment for them. AA is not an investment advisor. Its an airline (or possibly a points program with a side of an airline). They shouldn’t be making investments — they should be operating a business.
@nate nate – Thanks for reading and for your comment. This may be surprising to you, but “short term investments” is the second Asset line on the balance sheet. On a quick search I found this 10-k filing for American Airlines (https://bitly.com/3ultP1d) and at Q1 quarter end 2015, American Airlines held $8.125bn in “short term investments” compared with just $1.048bn in cash. In restricted cash and short term investments (which does not count fuel or accounts receivable) that adds another $757 million to the pie. And if we are seeing fuel hedges as asseets (along with other supplies) that comes in just under $1bn.
American Airlines makes short term investments all the time and keeps little cash-on-hand outside of this. Since I typed this post less than 12 hours ago, Bitcoin has risen from $56,000 to $58,300. On $1.5bn during that 12-hour period the airline would have netted $61MM free and clear. How many flights would they have to operate currently to earn $61MM free and clear?
Just as American Airlines isn’t really an airline – it’s a loyalty program that happens to fly planes, in some ways it’s an $8bn hedgefund (at least it was in 2015.)
I’m not going to get into it too deeply, but look up the Investment Act of 1940. The term “short term investments” is a term of art that basically is saying AA won’t be subjected to the 1940 Act regulations. There are many highly paid lawyers who do the work to make sure that wouldn’t happen for a company like American Airlines. Among the criteria determining whether a company would be subjected to 1940 Act regulation is whether their investments are short term or long term or things like whether their long term investments are in things core to their business (so in the case of an airline, something like hedging on oil, which they require to fly their planes).
While Tesla is more willing to play around with the rules (especially since they are still only profitable due to trading renewable tax credits, and not like their actual business model of cars and massive battery arrays), established companies like AA (or any other airline) would do everything they could to avoid 1940 Act regulation. Hedging on BitCoin would potentially put them into 1940 Act trouble and also would be an insane thing to do given its volatility.
For what it’s worth, American Airlines didn’t make a profit on flying passengers or cargo for nearly two years – just the sale of miles to partners. And that was in 2018/2019, arguably “peak travel.”
But I’d ask you to qualify an “insane thing to do given its volatility.” Other than the trend of the last 4-6 months in a hockey stick trend, it’s been pretty steady around $8-10k/BTC. The only exception to that would have been March 2020 due to COVID-19 but then again, AAL’s own stock would have been classified as “insane” by the same metrics.
Kyle, this may be surprising to you, but most companies keep little cash on the balance sheet. Instead they invest in short-term US government securities. Those are the “short term investments” listed on their Balance Sheet. Why? Because cash earns very little interest, and US govt securities earn a little more, have very little risk and are almost as liquid as cash.
Now, you may wonder how do I know this? Well, first I work in banking. But you could also figure this out if you read the 10-K or knew some basic accounting:
(1) Short-term investments are listed under “Current Assets”. Current assets are defined as cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets (source-Google it)
(2) Bitcoin is not a current asset because its not cash and not a cash-equivalent. Cryptocurrencies are not cash because they are not legal tender and are not backed by a government or other legal entity. For similar reasons, they are also not cash equivalents or foreign currencies under U.S. GAAP. (source: https://www.bdo.com/insights/assurance/financial-reporting/cryptocurrency-the-top-things-you-need-to-know)
If you read Tesla’s 10-K, you will see that they plan to “account for digital assets as indefinite-lived intangible assets in accordance with ASC 350”.
(3) AAL’s short-term investments are interest-bearing investments. We know this because they say “Interest income decreased in 2020 compared to 2019 primarily as a result of lower returns on our short-term investments.” So these aren’t stock investments (which by definition wouldn’t be a current asset — rather it would be classified on the balance sheet at a Long-Term Asset sitting on the same line as AAL’s investment in China Eastern ).
(4) The notes to the balance sheet contain even more details — the short-term investments are Money market funds, Bank notes/certificates of deposit/time deposits, Corporate obligations, and repurchase agreements.
(5) You also cite “Restricted cash and short-term investments”. AAL’s latest 10-K explains that money is primarily money market funds to be used to finance a substantial portion of the cost of the renovation and expansion of Terminal 8 at JFK and collateral held to support workers’ compensation obligations.
AAL is far from an $8bn hedgefund (using your 2015 numbers, now $4bn using the 2020 10-K).
I’m surprised you had to google to find an old financial statement for AAL. Why didn’t you use EDGAR? Perhaps looking at financial statements isn’t what you know. I agree with John Simmons before — stick to what you know.
How do you think shareholders would feel if AAL invested in BTC in 2017 at $20,000. For three years that investment would have been underwater. Whichever CFO made that decision would not have lasted three years to see that investment turn profitable. If you were a CFO, would you put your entire job on the line to invest in Bitcoin? It would have no upside for you (its the company’s money) and only downside risk. Sounds like a bad investment.
Geeze. Stop it with the crypto [redacted by admin]. Stick to what you know.
Why would you assume I don’t know more about cryptocurrencies than I do about travel?
You definitely don’t know much about accounting or corporate finance. That I can tell from this article.
Its possible you know more about cryptocurrencies than travel, but you really should only write about what you know. When you figure that out, please tell us.
Interestingly Air Baltic already accepts payments in cryptocurrency and has done for years. There are several private jet companies that also do so.
These Bitcoin people are crooks. I say: arrest the lot of them, lock ‘em away so they can5 cause innocent people to lose money. We have a system for currencies and, while far from perfect, it beats the hell out of letting these sleazebag shysters play fast and loose with the financial system ( including Egon Musk)
Everyone is a BTC expert these days. I can’t wait for it to crash. This is like the shoe shine boy giving stock advice to Joseph Kennedy.
When it comes to people who bought digital currencies that have appreciated a lot since time of purchase, may they be financially better off by using the digital currency for purchases of goods/services than selling the digital currency for USD or other government-issued currencies? I am thinking about what happens in a situation where Bitcoins exchanged for USD (or other government-issued currency) make for a taxable capital gain.
And the follow on is that counterparties that accept Bitcoins for goods/services may be able to then turn around and liquidate those purchases denominated in Bitcoins for US dollars pretty quickly thereafter.
Would the government really allow the very Bitcoin-“rich” people subject to capital gains taxation if selling appreciated Bitcoins for USD to instead turn around and use their Bitcoins to buy plane tickets in Bitcoins to try to avoid a capital gains realization for tax purposes?