Digital and cryptocurrencies have come a long way over the last decade. Could Bitcoin be the saving grace for struggling airlines?
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.
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?