Picking Through the Airline Rubble
We’re one vaccine away from crammed airline cabins and plenty of upside, but investors should be cautious bottom-fishing for airline stocks.
These companies are reporting zero bookings, total groundings, and passenger air miles might not recover for years. You can’t run a profitable carrier while accommodating social distancing at the same time. It’s just not possible. Airlines still incur costs for empty seats on flights. There could be too much capacity going forward, and the resulting profit-drag could stifle any immediate stock market spring back.
The bull case is clear, however. Air travel rebounding is an inviolate law of nature. This is a sector trading at two-times its historic profits, and bailouts, layoffs, and consolidation in the space might shore up finances until business returns to what it once was.
American Airlines will have some mammoth federal support to pay back. Its chief executive, Doug Parker, expects air travel to “stay suppressed for some time.” The US boasts the best airlines in the world, but that may create opportunities further afield.
Qantas has been left with a legal monopoly on Eurasian travel because its only competitor, Richard Branson’s Virgin Australia, has gone bankrupt. The same goes for Chilean LATAM, seeing its Columbian rival Avianca fall this weekend.
The Chinese ‘Big Three’ remain tight-lipped forecasting a recovery, but are taking the brunt of losses without government support. Ryanair, the popular low frills carrier in Europe, has denounced government loans altogether and is suing the European Union to topple rival rescues!
If it’s successful, expect the same shareholder splat as Norwegian Air and Singapore Airlines investors received. These companies raised money to survive by issuing more stock and diluting its value. Lufthansa, Germany’s flag bearer, has changed its investor-based altogether. The German government has taken a 25% stake in its operations.
In sum, it’s probably best to watch your step here. The c-suite consensus is for the industry to get back to normal in two or three years. With stock crashes so far averaging about 50%, getting ‘back to normal’ would mean a double on your money over the course of those three years. That’s pretty good, but with airline bankruptcy headlines becoming routine, this trade isn’t without risk.
