Evaluation of the Airline Industry
Anticipating better days or a sign of false hope?
Posted June 7, 2021
Key Takeaways
- Regional airlines with a point-to-point network are poised to make a strong comeback, with stock prices already exceeding pre-pandemic levels.
- Stock prices of some international hub carrier are still valued significantly lower as international traffic is expected to recover slower and business traveller might not come back in the same numbers at all.
- Investors in Chinese and American airlines can rely on the large domestic markets that have the ability to compensate losses from international routes.
The Covid-19 pandemic and the resulting shutdowns and travel restrictions around the globe have hit airlines in their core business. Both, number of tourists and business traveller, collapsed in spring 2020 following restrictions to travel and the attempt of many governments to keep the deadly virus out of their countries. After the summer and fall 2020 presented some cautious reason for optimism when tourism seemed to pick up, the second wave immediately stopped those developments later that year. With the approval and rollout of the vaccine in many countries, optimism is back in the travel and airline industry as booking numbers increase and people are desperate to leave their bubble for the first time in months for a sunny vacation over summer. Stock prices are broadly perceived as a good indicator where a business or industry is headed because investors consider the long-term revenue and growth potential of a company in their investment decisions. This article uses this mechanism to analyze the development of airline stock prices over the course of the pandemic in order to determine which airline or which business model are in the best position to make a strong comeback once the lockdowns and travel restrictions are ending.
The development of stock prices of major carriers around the world showcases two central factors that have had an impact on the evaluation of airlines' stock prices during the pandemic. The first decisive factor that investors seem to consider is the operating location of the airlines when they make an investment decision.
Chart 1
presents a comparison between the initial price drop of shares and the rebound that took off in summer 2020 across region and airline. If the light blue bar, which shows the rebound effect, surpasses the dark blue bar, then the stock price has already reached pre-pandemic levels. In the Asian market, airlines from China did not only experience the smallest decline in value (around -42%) but the stock price of China Southern has already recovered from its crash in spring 2020 with the other two major airlines, Air China and China Eastern, coming closer to a full recovery. With a market of 1.4 billion people, airlines in China are not as reliant on international connections than airlines in other countries. The demand for domestic flights in China recovered quickly in summer 2020 after the government eased the strict restrictions[1]. The International Air Transport Association (IATA) stated in a recent forecast
that it expects domestic travel worldwide to recover to “96% of pre-crisis (2019) levels in the second half of 2021” as people start spending their savings on vacations that they have postponed for over a year[2]. For international travel, on the other side, the experts predict a longer time towards full recovery that will depend on the continuous vaccination rollout, testing, and ease of travel restrictions. The effect of that fate can be seen for many airlines in North America (NA) and Europe that have suffered significantly steeper declines in their stock prices as their national governments tightened travel restrictions early that in many cases are still in place today.
The opposing effect when relying on international travel can be seen in Chart 2 (see in gallery below) for other airlines in the Asian-Pacific market that are based in small domestic markets and dependent on international travel and still lack the dynamic growth in stock prices. Cathay Pacific, the flag carrier of Hong Kong, operates an extensive continental and inter-cont. network and offers relatively few destinations to Mainland China. Singapore Airlines, Qantas or Air New Zealand are still notating around 40% under their prices of early 2020. Australia and New Zealand basically isolated themselves from the international community, which is a problem for a country and airline that basically live off tourism, immigration and visitors. All these airlines are still lacking the dynamic growth in stock prices that are connected to a revitalizing domestic demand in China.
Showcasing Comeback Potential
Even though the situation is still strained around the world, some airlines in Europe and NA also showcase an impressive comeback story, which draws the attention to the second factor that drives investors’ decisions particularly after the initial crash. When investors consider which airline is poised to make a strong comeback, they look at the business model. The general agreement among experts is that the leisure and tourism sector will pick up speed before business travel will. Industry leader like Spirit CEO Ted Christie have expressed their expectation that “growth in the airline industry is going to be at the leisure end”[3]. Some even express their concern that business travel might never reach pre-Covid levels ever again as managers have grown accustomed to video calls. Delta CEO Ed Bastian told AP in fall 2020 that the “new normal of business travel” might lie 10 % to 20 % lower than it used to be[4].
Thus, it is the logical consequence that point-to-point and low cost carriers Southwest, JetBlue and Alaska Airlines in the U.S. or Ryanair and Wizz Air in Europe lead the way in Chart 3 that presents the path of stock value recovery. These five airlines, along their Chinese counterpart Chinese Southern are valued by investors about the same or even higher today than they were before the pandemic hit. Other airlines that are more dependent on their international network are still lagging behind and find their stock prices in a relatively horizontal movement. The fact that EasyJet as a point-to-point airline has not been able to start a strong comeback might be related to Great Britain officially leaving the EU at the turn of 2020 to 2021 and the insecurities surrounding future traffic between the two communities. The same circumstances affect IAG as mother company of British Airways.
Touched upon before, the size of the domestic market is a connecting point between the two factors and influences the evaluation in other parts of the world as well. In NA, United, Delta and American Airlines are considered to be hub airlines with a considerable international network, however, the prospects of a surging demand in the large domestic market
let their stock prices rise as well. The U.S. government set up a payroll assistance package to U.S. airlines[5] early on into the pandemic and has extended benefits two times with the most recent agreement[6] securing jobs through September 2021. Further support includes grants and low-interest loans to participating airlines.
Chart 4 shows that the stock prices of American Airlines, Delta and United have recovered slower but steadily and should see future growth as the U.S. continue to open up. For a long time, north of the border, Canadian airlines had to fight their own battle as the federal government refused to provide any financial support for the suffering industry. Only recently did the Canadian government pass a financial package that grants loans and securities to airlines[7]. The stock price of Air Canada, the national flag carrier, increased significantly in 2019 only to see it fall even deeper with the onset of the pandemic. As of today, it has not recovered because Canada has still strict travel restrictions in place that impair both international and inter-provincial travel.
European Airlines: Government support secured, but flag carrier are still struggling
No other region represents the benefits and issues related to domestic, continental and inter-continental traffic during the pandemic better than Europe. As travel restrictions prevented any significant inter-cont. traffic, the airlines turned towards the sunny destinations on the continent. However, as governments change their declared risk areas almost daily, the industry is still facing considerable uncertainty. At the same time, an increasing ecological conscience of many citizens and politicians forces the airlines to rethink their domestic destinations. Thus, it is not a surprise that the trend lines in Chart 5 show quite different dynamics that range from strong recovery of the low cost airlines to stagnation after the crash in the case of IAG or Air France – KLM.
The dynamics in the European airline market are amplified by the intervention of many national governments to support their flag carriers either through issuing credit lines and guarantees for bank loans to the airlines in financial distress or increase their stakes in the airlines. Both
Denmark and
Sweden, for example, increased their respective stakes in SAS to 21.8 % in October 2020 through a recapitalisation plan[8]. Part of the German government’s bailout program worth 9 billion Euro to save its national flag carrier Lufthansa is the acquisition of a 20 % stake in the company[9]. Nevertheless, the airline is still expected to implement a restructuring plan that would result in the cutting of more than 20,000 jobs. Similar measures of financial support were taken by the governments of France (Air France)[10], the Netherlands (KLM)[11], Great Britain (British Airways, EasyJet, Wizz Air and Ryanair)[12], Switzerland (Swiss – part of Lufthansa Group)[13], Finland (Finnair)[14], Spain (Iberia & Vueling – both part of IAG)[15], Portugal (TAP)[16]. As a result of increasing government involvement, some airlines are facing new demands to reduce short- and medium haul flights or increase prices in an effort to reduce their carbon footprint. As part of Austria’s rescue program for Austrian Airlines the government requires the airline to cut CO2 emissions within Austria by half by 2030 and move passengers to rail where possible[17].
The reason why no South American airline is represented in the charts above is owed to the unfortunate situation that the local airline market came under significant pressure during the pandemic. The South American market presents a good example for what would happen to airlines that suffered from strict travel restrictions and the simultaneous incapability to agree on terms with their national governments to receive any form of financial support. The two largest international carriers, LATAM[18] and Avianca[19] filed for bankruptcy in May 2020. The largest domestic carrier in Brazil, GOL Linhas, was barely able to survive the last year but is now communicating cautious signs of optimism[20]. Other major airlines that suffered a similar fate in light of the Covid-19 crisis and had either to file for bankruptcy or undergo a restructuring process include Norwegian Air (Norway)[21], Aeromexico (Mexico)[22], Thai Airways (Thailand)[23] and Virgin Atlantic (Australia)[24], leaving out other airlines that were already in financial distress before the travel restrictions were implemented.
Outlook
In 2020 the airline and travel industry has been facing unprecedented challenges with many borders closed for international travel and restrictions that further impeded any efforts to resume regular services. Today, with an increasing availability of vaccines and a more optimistic assessment of all stakeholders to enable domestic and international travel when it is safe to do so, we should soon expect more carriers to reactive their fleets and expand their route network. The expectation among experts is that domestic and continental tourism traffic will pick up rather quickly, and the stock prices of leisure and low cost airlines reflect that expectation. The recovery of large international or hub airlines’ stock prices is an indication that international (inter-cont.), and business travel might take years to recover. The next months will show which airline took the past year to streamline its administrative processes, overhaul its route network and kick-off innovative processes that will ensure their long-term profitability with the reduction of CO2 as the largest challenge after the pandemic.
Footnotes
[1] BBC. 2020. "Coronavirus: Flights within China to 'fully recover' next month." https://www.bbc.com/news/business-53927980.
[2] IATA. 2021. "Reduced Losses but Continued Pain in 2021." https://www.iata.org/en/pressroom/pr/2021-04-21-01/.
[3] Josephs, Leslie. 2021. "Spirit Airlines is hiring pilots and flight attendants again in hopes of pandemic recovery."
https://www.cnbc.com/2021/02/12/spirit-airlines-hires-pilots-flight-attendants-in-hopes-of-covid-recovery.html.
[4] AP. 2020. "Delta posts $5.4 billion 3Q loss as pandemic hammers travel." https://apnews.com/article/virus-outbreak-travel-business-
airlines-ed-bastian-517d20f46eeb171066f73cbfedae6ad9.
[5] New York Times. 2020. "Crippled airline industry to get $25 billion bailout, part of it as loans."
https://www.nytimes.com/2020/04/14/business/coronavirus-airlines-bailout-treasury-department.html.
[6] Reuters. 2021. "U.S. extends $14 billion lifeline to airlines in third government aid package." https://www.reuters.com/article/us-health-
coronavirus-usa-airlines-idUSKBN2B22LX.
[7] Jones, Ryan P. 2021. "Federal government, Air Canada reach deal on relief package that includes customer refunds."
https://www.cbc.ca/news/politics/air-canada-financial-relief-1.5984543.
[8] Yahoo!finance. 2020. “Sweden, Denmark dig deeper to save SAS.” https://uk.finance.yahoo.com/news/sweden-denmark-dig-deeper-
save-SAS.
[9] Reuters. 2020a. “Lufthansa investors back $10 bln German government rescue.” https://www.reuters.com/article/us-health-
coronavirus-lufthansa-rescue-v-idUSKBN23W2SI.
[10] Bloomberg. 2021. “French State Tightens Grip on Air France-KLM With 29% Stake.” https://www.bloomberg.com/news/articles/2021-04-
19/air-france-klm-raises-1-25-billion-giving-france-a-28-6-stake.
[11] Government of the Netherlands. 2020. “Government offers financial support to KLM as a result of the corona crisis.”
https://www.government.nl/latest/news/2020/06/26/government-offers-financial-support-to-klm-as-a-result-of-the-corona-crisis.
[12] The Guardian. 2020. https://www.theguardian.com/world/2020/jun/04/airlines-and-carmakers-benefit-from-uk-covid-relief-scheme.
[13] Mombelli, Alrlando. 2020. “Parliament approves funds to keep vital Swiss air links open.” https://www.swissinfo.ch/eng/coronavirus-
and-airlines_parliament-pays-up-to-keep-vital-swiss-air-links-open/45740514.
[14] Reuters. 2020b. “Finland plans to help Finnair with 400 mln euro loan.” https://www.reuters.com/article/finnair-loan-idUKL1N2IW0F4.
[15] Reuters. 2020c. “IAG's Spanish airlines secure $1.1 billion of state-backed loans.” https://www.reuters.com/article/us-health-
coronavirus-iag-debt-idUSKBN22D56D.
[16] FlightGlobal. 2021. “EU approves €462 million of support for TAP Air Portugal.” https://www.flightglobal.com/strategy/eu-approves-462-
million-of-support-for-tap-air-portugal/143458.article.
[17] CAPA. 2020. “Austrian Airlines bailout protected by taxes and fare floor.” https://centreforaviation.com/analysis/reports/austrian-
airlines-bailout-protected-by-taxes-and-fare-floor-527571.
[18] Forbes. 2020a. “LATAM Bankruptcy Has Initial $2.2 Billion Debt Just From 61 Aircraft.”https://www.forbes.com/sites/willhorton1/
2020/05/26/latam-bankruptcy-includes-22-billion-debt-for-61-aircraft-in-chapter-11-filing/?sh=780f09513a18.
[19] CNN. 2020a. ”Avianca, one of Latin America's largest airlines, files for bankruptcy.“ https://www.cnn.com/2020/05/11/business/avianca-
airline-coronavirus-bankruptcy-chapter-11/index.html
[20] Yahoo!finance. 2021. "Gol Linhas (GOL) Sales Rise 75% in April on Improving Demand." https://finance.yahoo.com/news/gol-linhas-gol-
sales-rise-130401536.html
[21] CNN. 2020b. “Norwegian Air has filed for bankruptcy.” https://www.cnn.com/2020/11/18/business/norwegian-air-bankruptcy-
protection/index.html.
[22] CNN. 2020c. “Aeromexico files for US bankruptcy, citing 'unprecedented' challenges.”
https://www.cnn.com/2020/07/01/business/aeromexico-us-bankruptcy-intl-hnk/index.html.
[23] CNN. 2020d. “Thai Airways survives for now as government orders overhaul.” https://www.cnn.com/2020/05/19/business/thai-airways-
bankruptcy-intl-hnk/index.html.
[24] Forbes. 2020b. “You Won’t Believe How Many Airlines Haven’t Survived Coronavirus. How Does It Affect You?”
https://www.forbes.com/sites/laurabegleybloom/2020/06/27/airlines-coronavirus-travel-bankruptcy/?sh=2ce3d0505f69.
