What does the future of airlines look like?
2020 has probably been the toughest year ever for the global airline industry, as the pandemic forced governments to declare lockdowns and reduce mobility to prevent the spreading of the covid-19 virus. Airlines were the most affected transportation business since many countries started imposing flight bans from and to the rest of the world, and the industry has a particularly high fixed cost structure. In fact, an airline company must pay for fuel whether the airplane is empty or full, and even if it decides to ground its fleet, it is still an expensive decision.
A quick look at the numbers is enough to realize the magnitude of the problem airline companies are facing. In March at least 70 airlines around the world had grounded themselves completely, according to Cowen investment bank. Peter Harbison, chairman of the industry group Centre for Aviation, told the Financial Times “At the current rate, up to 80 percent of the world’s overall fleet could be grounded as a result of coronavirus travel restrictions”, which turned out to be true during the following months when demand for air travel became virtually non-existent. But keeping a fleet parked can cost up to tens of millions of dollars a day, because of parking, maintenance, leasing, and tens of thousands of employees. Delta airlines, for example, has burned 11,634 billion dollars in just nine months and competitors did not do any better. The International Air Transport Association (IATA) released its financial outlook for the global air transport industry showing that “airlines are expected to lose $84.3 billion in 2020 for a net profit margin of -20.1% while revenues will fall 50% to $419 billion from $838 billion in 2019.”
The airline industry started facing the crisis already with some debt, which resulted in 43 bankruptcies in 2020, even though things could have been much worse if it had not been for extensive government support, estimated to be at least €149 billion to date, that has played a major role in saving several weak carriers from collapsing, as declared by The International Air Transport Authority. But while financial relief measures by governments have kept airlines from going bankrupt, they have ballooned debt by $120 billion to $550 billion (which is about 92% of expected revenues in 2021), as reported by IATA. Current stock market values differ from each company, with some major players that have lost a lot of ground as a natural consequence of business, like American Airlines (-40.59%), Delta (-31.04%), Lufthansa (-27.67%), Air France-KLM (-46.58%), Easy Jet (-45.68%) and others who are better off like Ryanair (trading around the same levels of 2019) and Southwest Airlines (-10.08%), both with a “buy” and “outperform” rating from analysts.
So, what about the near future? Thanks to the new vaccination measures the global economy is expected to recover in 2021, and so will tourism, but we may underestimate the fact that it might take more time than expected to inoculate more than 7 billion vaccines. In 2021, losses are expected to be cut to $15.8 billion as revenues rise to $598 billion (IATA), but even being optimistic, problems are far from over, with mountains of debt to be paid in the next years. In the end, it all comes down to one key factor: time. A quick recovery from the pandemic would save many airlines from bankruptcy or the need for more state intervention. Investing in these companies today seems very unattractive, because of debt and uncertainty, so unattractive that even Warren Buffett, Berkshire Hathaway chairman, sold the entirety of its position in the U.S. airline industry back in May.
What do you think about the future of the airline industry? When will the industry become attractive again for investors? Tell us in the comment section or the discussion page!