Clear Skies Ahead? Can US-China Flights Propel 3 Airliners for Takeoff?

With the pandemic firmly in the rear-view mirror, consumers are ever keener to redeem their pile of airline miles on other travel rewards on their credit cards for new experiences through “revenge travel.” Revenge travel has its origins in “baofuxing xiaofei” or “revenge spending,” an economic trend that originated in 1980s China when a growing middle class had an insatiable appetite for foreign luxury goods.

Since e-commerce, albeit with a few hiccups in the supply chain, was able to satiate the appetite for goods through the pandemic, Americans are now going above and beyond to compensate for the years spent indoors trying to substitute real experiences with virtual ones.

The trend is expected to gain further momentum with the relaxation of restrictions on international travel that were put in place by China as part of its strict and controversial “Zero-Covid” policy. Consequently, air traffic between the U.S. and China is expected to double in volume by the end of October.

According to an order by the U.S. Transportation Department, each country will gain an additional six weekly round-trip flights as of September 1, up from the current 12, with the total number of flights for each nation planned to rise to 24 by October 29.

In this context, here are three U.S airlines that stand to benefit the most from the persistent tailwind:

On July 13, Delta Air Lines, Inc. (DAL) reported record revenues and earnings for the fiscal second quarter driven by strong demand for international travel, premium seals, and a 22% decline in fuel expenses. The Atlanta-based airline’s adjusted revenue and EPS came in at $14.61 billion and $2.68, compared to consensus estimates of $14.49 billion and $2.40, respectively.

Given that airlines conduct the bulk of their business in the second and third quarters, DAL hiked its 2023 earnings forecast to an adjusted $6 to $7 a share, up from its previous estimate at the high end of a $5 to $6 per share range.

United Airlines Holdings, Inc. (UAL) has also been on a purple patch which has seen the carrier posting record quarterly earnings and forecast a strong third quarter amid an unprecedented domestic and international travel boom.

The carrier’s total revenue came in at $14.18 billion, compared to consensus estimates of $13.91 billion. Its net income came in at $1.08 billion, which resulted in an adjusted EPS of $5.03 for the quarter that surpassed Street expectations of $4.03.

International flights made up 40% of the revenue, but the segment is growing faster than domestic ones amid the overdue relaxation of strict Covid restrictions overseas. 

Despite ten consecutive interest-rate hikes by the Federal Reserve, it isn’t difficult to connect the dots and understand why American Airlines Group Inc. (AAL) has had to turn to bigger airplanes, even on shorter routes, and jumbo-jets, such as the Boeing 747 and the Airbus A380, are being brought back to help ease airport congestion and work around pilot shortages.

As a result of this tailwind, AAL’s revenue for the fiscal second quarter topped analyst estimates to come in at a record $14.06 billion, up 4.7% year-over-year. With the airline’s executives bullish on travel demand, particularly for international trips, the operator has raised its earnings outlook for the fiscal year 2023.

Dark Clouds Around the Silver Lining

If something cannot go on forever, it will stop.” The obviousness of this observation made by Herb Stein was what made it famous.

Amid widespread convictions that pent-up demand for travel will be a multi-year demand set, it is easy to get carried away by the “pent-up demand” and “revenge travel” narrative.

However, the rise of remote work and virtual teams, facilitated by contemporary collaboration and productivity tools, seems to have become an immune and immutable remnant of the cultural sea-change our work and lives had to adopt and adapt to during the pandemic, new reports give us reasons to doubt whether business travel is ever going back to normal.

In such a situation, with traveling for leisure being an occasional indulgence in most of our lives, there are risks that the pent-up demand might not be enough to sustain the momentum that is propelling the growth performance of DAL and other airlines, which are primarily in the business of ferrying passengers.

Moreover, with ticket prices at all-time highs and the stash of pandemic stimulus cash, fueling the leisure travel boom expected to run out over this quarter, it is unsurprising to find tricks and trends, such as ‘skip-lagging’ and consumers trading down on travel being on the rise.

Across the Pacific, with the Chinese economy currently battling triple threats of deflation, chronically high youth unemployment, and an ever-intensifying real-estate debt crisis, it could be unrealistic to expect any appreciable recovery in overseas travel demand among the aging, shrinking, and deurbanizing Chinese population that’s holding on to its savings for dear life amid macro-economic uncertainties that could bring about a lost decade.

Moreover, geopolitical relations between the U.S. and China have been souring because of differences regarding the latter’s territorial claims. The trade war between the two superpowers is intensifying amid restrictions on exports of semiconductor chips and investments in other cutting-edge technology by the former, and the latter upping the ante won’t help matters either as far as civil aviation between the two countries is concerned.


While U.S. air carriers and their Chinese peers would want nothing more than for passenger demand to stay strong and, perhaps, keep growing, the most likely case would be a return to seasonality and cyclicality, as is typical of the airline industry.

However, the possibility of passenger demand falling off a cliff and investors rushing for the exits only to find that the clock struck midnight and the chariot turned back to a pumpkin can’t be completely ruled out.

Either way, every flight that takes off has to land at some point. However, amid widespread tail risks, investors, both current and prospective, would be wise to fasten their seatbelts because the skies ahead are anything but clear.

Insight Into Warren Buffett's Strategy: Unveiling His 40 Million General Motors (GM) Shares and the Investment Implications

Berkshire Hathaway Inc. (BRK), led by fabled investor Warren Buffett, also fondly known as The Oracle of Omaha, owns 22 million General Motors Company (GM) shares, equating to a 1.6% stake in the legacy U.S. automaker.

A fundamentally robust company such as GM deserves its spot in a conglomerate's portfolio with a reputation for acquiring parts or the entirety of businesses that possess enduring competitive advantages and are likely to be aided by favorable economics in the long run.

On the back of a strong performance in the fiscal 2023 second quarter, the Detroit-headquartered auto giant has raised its guidance for 2023. The company raised its net income expectations for the fiscal from a high end of $9.9 billion to a high end of $10.7 billion. Its automotive division’s free cash flow is also expected to come between $7 billion and $9 billion, up from $5.5 billion to $7.5 billion.

In addition, GM said it is increasing cost-cutting measures through next year and now plans to cut $3 billion in expenditures compared with previous guidance of $2 billion. The financial outperformance driven by the booming traditional automotive business powered by highly profitable trucks and SUVs has enabled the company to ramp up its presence in the electric vehicle (EV) segment.

Consequently, GM reiterated that it would double EV production in the year's second half to 100,000 units. In addition to the long-awaited introduction of an electric Chevrolet Silverado pickup truck and EV versions of Chevy’s Equinox crossover and Blazer compact sport-utility vehicle, the company says it will reach 400,000 cumulative units of EV production by early 2024.

GM also anticipates that its EV business will reach profitability by 2025, with an EV production capacity of 1 million units in North America and EV revenue of roughly $50 billion.

In addition, the company is making itself future-ready by fixing supply-chain issues with measures such as a $60 million investment round in Mitra Chem, a California startup working on cheaper EV batteries. Mitra Chem aims to develop low-cost lithium iron phosphate batteries that can hold more power than current versions. If it’s successful, its batteries could appear in GM’s EVs later this decade.

GM is also developing its Ultium EV platform, which will help reduce costs and improve profitability. In addition, GM is diversifying to more potentially lucrative businesses such as Cruise, its driverless cab service, and BrightDrop, which is focused on helping businesses meet consumer demand for last-mile services.

All the above factors make GM an apparently solid bet in the automotive sector and a far cry from cash-strapped and debt-burdened EV upstarts that are struggling to keep themselves afloat amid increased borrowing cost due to sustained interest-rate hikes and EV price war that has been waged by Tesla, Inc. (TSLA).

The Flip Side

When asked about when to sell stocks, Buffett famously replied, “To break off relationships with people that I like and people that have joined me because they think it’s a permanent home, to do that simply because somebody waves a big check at me would be like selling one of my children.”

So when the legend, whose favorite holding period is forever, decides to cut his stake in GM, a business his company has owned since 2012, by almost half, it can only mean that either BRK is chronically short of funds and has been finding numerous opportunities to put them to better use or the economic characteristics of the business change in a big way.

Since BRK is sitting on a mountain of cash worth at least $147 billion, we can definitely count out the former possibility. As far as the latter is concerned, carmakers in the U.S. and Europe are once again under siege.

However, this time around, the war is on climate change, the goal is rapid decarbonization and energy transition, the battleground is smart, connected, and electric mobility solutions, and the invaders are from the other side of the Pacific, beyond the Sea of Japan.

Recently, after BYD Company Limited (BYDDY) delivered its five millionth electric vehicle, its founder Wang Chuanfu declared the “time has come for Chinese brands.” And he has good reason to be optimistic. Chinese automakers have access to its vast domestic market, abundant supplies of resources, such as rare earths, which are critical for energy transition, and a government keen on seeing its domestic brands compete globally.

China’s dominance in rare earth and other clean energy metals is back in the limelight after the recent export restriction on germanium and gallium. With the trade war between the U.S. and China intensifying amid restrictions on exports of semiconductor chips and investments in other cutting-edge technology by the former, the latter is expected to keep upping the ante.

This could hurt the prospects of Western car manufacturers as they might be compelled to deal with increased input costs on top of exchange-rate headwinds and credit crunch due to the Federal Reserve ratcheting up the benchmark borrowing cost to 5.25%-5.50% from nearly 0% in the space of 16 months. 

While carbon border tax and other protective measures could provide temporary shelter for besieged Western automakers, the beneficiaries stand to lose more if the Chinese government cuts off their access to the massive domestic market on which the Chinese automakers could always fall back upon encountering turbulence overseas.

Moreover, with Vietnamese EV-maker VinFast Auto Ltd. (VFS) surpassing the market capitalization of heavyweights, such as Ford Motor Company (F) and GM, in the words of VW chief Thomas Schaefer, “The roof is on fire,” and according to former Aston Martin chief executive Andy Palmer, manufacturers in Europe and the US face a “real and present danger” from the East.


GM, first added by BRK in 2012, now constitutes merely 0.2% of the conglomerate’s portfolio of marketable securities, which in turn is just a component of its holdings, which are comprised mainly of wholly owned businesses.

Therefore, instead of being denominator blind and jumping on the Buffett bandwagon, it could be wise for investors to hold their horses and verify if Western automakers can hold their own against Oriental challengers before making an investment decision.