Introduction
Hello and welcome back to Mortgage Advisor on F.I.R.E. This week I will discuss the impact of coronavirus on the airline industry. I will also look back over the past six-months since this blog started and analyse the progress made. First of all, there is the weekly update and a quick note about my biking challenge to help support the NHS.
Weekly Update
The biking challenge is going well. I’m up to 1,160km, which means I’m about 40% of the way through. When I started, I needed to complete just over 45km a day to be on track to complete the distance by the deadline. I’ve averaged just over 55km per day, and because I’m ahead of the game my required daily average has dropped to 40.5km. The plan is to try and motor through another week to bring that required daily average down further. Then, I can start to ease off towards the end of the distance and resume studying for my Financial Advisor exams.
The most difficult part of this fundraising has not been the biking itself. My legs have not felt that tired as I have good muscular stamina in them. The problem has been that the saddle is so very, very uncomfortable even with padded cycling shorts and a new cover for the seat. Rather than completing a full hour at a time, I have to peddle for half an hour, take a break for five minutes and then start again just so I can get some feeling back. I’m pushing through though and if I continue with the 55km daily average I should complete in 31 days.
If you can afford a few pounds to donate to the cause, please do. If you can’t afford a donation at this time, please share my Just Giving page around. The link is here:
https://www.justgiving.com/fundraising/david-scothern6
Financial Update
Premium Bonds: £15,050 (up £50 from last week).
Stocks and Shares ISA: £7,942.03 (down £84.12 from last week).
F**k It Fund: £5,001.15 (up £520 from last week).
Property Value: £181,626 (no change from last week).
Total Assets: £209,619.18 (up £405.88 from last week).
Residential Mortgage: £144,906.05 (no change from last week).
Total Debts: £144,906.05 (no change from last week).
Total Wealth Figure: £64,713.13 (up £485.88 from last week).
Investment Income in 2020: £31.44 (no change from last week) (target £2,000).
When I first set out on this journey I had two short-term targets in mind for my finances; to get £14,850 saved in Premium Bonds, which would form my half of the deposit for a BTL property. The second target was to have an emergency fund of £5,000, so that if things got bad I could just say “Fuck It” and I’d have money to live for at least six-months. It just so happens that this week’s post is part twenty-six and the blog is now six-months old, so it’s fitting that I finished saving for my Fuck It Fund this week. I will still put money in there from time to time but it’s no longer a priority.
Priorities
When I look back at my financial position in the early days of this blog, I was in a very different place. My first financial update looked like this:
Premium Bonds: £8,250
Stocks and Shares ISA: £6,519
Fuck It Fund: £850.96
My credit card and loan debt was nil at week one, but in the first few weeks it ramped up to several thousand due to holidays, Christmas and other expenses. In the space of six months I’ve increased the value of my savings and investments by around £12,000. I think that’s good progress considering everything going on in the world right now.
Now that I’ve hit the target for my Fuck It Fund, and the only debt I have is my own mortgage, my priority is to start earning more income from investments. To really earn serious money from investments, I need property. The only issue is, while ever this pandemic is active it’s going to be difficult to complete any property purchases. My focus will be to increase my BTL deposit fund further, and to accumulate more shares in my ISA. Property and stocks are the two pillars which will financially support me when I choose to transition from paid employment into the next chapter of my life.
To try and turbocharge that transition, I’m keeping a soft-target in my mind which is to invest at least £1,100 each month, as well as reinvesting any investment income I receive. I’ve been investing around £800-£900 per month so far, which means I need to free up cash elsewhere and/or earn more. I’ve been doing a few bits of overtime here and there recently as it only takes a few hours a month extra to earn that additional £200-£300.
Airlines
There have been a few news articles in recent days that state most major airlines are breaking the law due to the impacts of Coronavirus. In brief; airlines are required to give refunds if your flight is cancelled. What’s happening now is that airlines are facing unprecedented demand for refunds as a result of the sheer volume of flights being cancelled globally. If the airlines were to refund everyone, many of them would go out of business.
I get the argument that airlines should have been better prepared and have bigger cash reserves. That can be said about pretty much every business at the moment. It seems like the only major businesses that are doing ok are food retailers. Normally, when I see businesses fail I feel sorry for the front line staff who face losing their jobs, whilst being critical of the senior management for presiding over the failure of the business. This situation is a bit more complex though.
I’m no expert in the airline industry but there are a few things I’ve observed. The first thing is that airlines are highly reliant on constant cash flow. They sell lots of units (seats on planes) for relatively little money per unit. Compared this to some businesses that can survive on one massive sale per week. Also, airlines often make little or no money on the price of a seat on a plane. Some airlines even make a loss on some seats. The profit comes from baggage fees, upgrades, food and drink, and so on. The margin for airlines has decreased over the years because the public have demanded cheap air travel. I believe those days are over for the time being.
Social distancing is going to hit the airline industry hard. New laws could mean that aircraft capacity has to be reduced. Despite what people commonly think of air quality on planes, modern aircraft have extremely advanced air filters. The main issue with travelling in cramped conditions is that you could breathe in contaminated air before it has a chance to be filtered. This means capacity will have to reduce. As capacity reduces, prices go up as there are certain costs of airlines that are going to be pretty static whether you are flying fifty passengers or two-hundred. I’m thinking about pilot and cabin crew wages as an example, as well as airport fees for the airline.
Although there will be people itching to fly off to the beach when this pandemic is over, there will be a substantial number of people who will be hesitant to travel. The airlines will be looking at a smaller customer base, with potentially reduced capacity on their aircraft. Prices will have to go up. It’s inescapable if airlines want to survive.
How does this all relate to airlines breaking the law? Well, if airlines were to give refunds out to everyone now, they will run out of money before refunding everyone. The numbers just don’t add up. We can debate all day long about whether they should have managed their money better, but it doesn’t change where we are at now. I have a flight coming up in around six-weeks and it’s almost certain I will not be travelling. I’m also expecting to be offered a credit voucher instead of a refund. I want my money, but I also want the airlines to survive as I enjoy cheap travel. I’m looking at this almost like delayed gratification. It’s like the marshmallow experiment in psychology. Children are left alone with a marshmallow and are told that if they don’t eat it, when the scientist comes back they can have two. If they eat it before the scientist comes back, they do not get another.
I have another fear that airlines could struggle for another reason completely. This pandemic has raised serious questions about how porous many borders are. When the virus was just starting to hit our shores, I was in India. All it took to enter the country was a form and a stamp. It was not necessary to provide any medical history, apart from confirming I had not travelled to China recently, or undergo any routine medical checks. On the way out of India just a couple of weeks later we had our temperature checked. In a globalised society with ease of travel across borders it’s not difficult to see how easily the virus was able to spread. I would not be surprised if many countries adopt a more strict border policy requiring people to present proof of vaccination (assuming a vaccine is developed) and a full medical history prior to entry. Far from being too strict, I think it’s quite sensible. The only drawback is that the checks would have to be done prior to boarding the aircraft, or else you risk spreading the virus to everyone else onboard. Combined with more expensive tickets, stricter border controls could make it even more difficult for airlines to survive the next few months.
Final Notes
Thank you again for reading and I hope you and your loved ones are safe and well. Next week I will look forward to the one-year mark and give an overview of where I would like to be on my journey to financial independence at that time.
Mortgage Advisor on FIRE. 