• Industry Spotlight

Frank Holmes Are airlines flying high or failing to get off the ground?

In this article Frank Holmes, CEO of U.S. Global Investors, takes a detailed look at the airline industry.


For this Frank Talk, I decided to take a deep dive in the airline industry to see how it fared in the first quarter of 2021, one year after the start of the pandemic. The four major domestic airlines have all reported as of 22 April and, even though big losses were expected, it’s clear to me they’re being managed extraordinarily well during these unprecedented circumstances. 

 

Strengths

The best performing stock for the quarter in the Bloomberg World Airlines Index was JetBlue [JBLU], up 32.67%. The low-cost carrier expanded its services during the quarter by introducing Paisly, a new website that allows customers to book hotels, vacation homes, theme park tickets and more. It will also begin transatlantic flights to London’s Heathrow Airport this summer. American Airlines [AAL] said it turned cash flow positive in March on an adjusted basis after an increase in domestic and leisure travel. As of 26 March, the carrier’s seven-day moving average of bookings was around 90% of what it saw at the same time in 2019, according to Simple Flying.

Airports in Mexico serving popular travel destinations reported record traffic in March — greater, in fact, than the traffic seen in the same month in 2019. Cancun International Airport said arrivals finished the month at nearly 700,000, a new record for March and an increase of 5% from March 2019. Among the airports that also reported encouraging travel numbers compared to two years ago were Ciudad Juarez, Hermosillo, La Paz and Mochis.

On 18 April, the Centers for Disease Control and Prevention (CDC) reported that half of all American adults had received at least one vaccine dose. The news came one day before every adult in the country became eligible to sign up for vaccination. The daily number of passengers boarding commercial flights in the US jumped nearly 60% during the quarter, from around 800,000 at the beginning of the year to as many as 1.3 million.

 

Weaknesses

The worst performing stock in the Bloomberg World Airlines Index was Jet2.com [DTG] down 11.47%. The British low-cost leisure airline was forced to suspend service until the end of March as the number of COVID-19 cases in the UK climbed sharply.

US carriers continued to report steep losses due to the pandemic. United Airlines [UAL] reported a net loss of $1.4bn in the quarter ended March 31, compared to a loss of $972m a year earlier. The carrier adds that it may not return to profitability until there’s a substantial rebound in business and international travel. Delta Air Lines’ [DAL] loss came in at $1.2bn, down more than 1,900% from the same period in 2020. Southwest Airlines [LUV] reported a net loss of $1bn and American Airlines a loss of $1.3bn.

Czech Airlines, the world’s fifth oldest commercial airline, declared bankruptcy in March, with total debt equalling $82m. This was on top of a number of global bankruptcies in 2020 due to the pandemic, including Avianca, Colombia’s flag carrier and the second largest airline in Latin America.

 

Opportunities

Analysts at consulting firm Oliver Wyman predict that US domestic air travel will fully recover by early 2022. According to its Airline Economic Analysis 2020-2021, the firm says that vaccination efforts are moving much more quickly than earlier anticipated, potentially resulting in a nationwide return to pre-COVID-19 domestic travel conditions by next year. Business and international travel, on the other hand, may take another year to fully rebound.

The industry saw two airline IPOs in the first quarter of 2021, a sign that investor sentiment is improving and that carriers see an opportunity as leisure travel continues to recover. Sun Country Airlines [SNCY] raised $218m on its first day of trading in mid-March, with shares rising 52%. On 1 April, fellow low-cost carrier Frontier Airlines [MM], the last of the 10 largest US-based airlines to go public, began trading.

American Airlines says it expects to have its full fleet up and flying by May after a major increase in bookings ahead of the summer travel season. In late March, bookings through aa.com and the American Airlines app were up as much as 400% compared to the same time last year, resulting in a load factor of nearly 80% on scheduled flights. Meanwhile, Delta will reopen all of its Sky Club airport lounges by this summer, according to Ed Bastian, CEO of the company. The Atlanta-based carrier will also begin selling the middle seat on 1 May. It was the last of the four major domestic carriers to block the middle seat.

 

Threats

The international community is sounding the warning bell against the high cost of certain COVID-19 tests and vaccine passports, claiming they would disproportionately impact travellers from smaller economies. Willie Walsh, the director general of the International Air Transport Association, accused makers and providers of polymerase chain reaction tests of profiteering from travel. Meanwhile, the World Health Organisation warned that people should not be required to prove they’ve been vaccinated against COVID-19 in order to travel, as it may isolate travellers in low-income countries who may not have access to the vaccine. The US State Department is said to be reviewing countries on its “do not travel” list, with an estimated 80% of the world appearing on the list.

Many of Europe’s largest carriers are staying afloat thanks only to government assistance, leading some investors to worry about a return to airlines being operated by the public sector. According to Bloomberg, the government of France is now the largest shareholder of flag carrier Air France [AF], with its stake at 30%. Germany’s Deutsche Lufthansa [LHA], Sweden’s SAS AB [SAS] and TAP Air Portugal [BTAPB.LS] also currently have an outsize state presence due to the pandemic. The industry in Europe was deregulated in the late 1980s and 1990s.

A YouGov poll in April found that four in 10 European business travellers plan to travel less even after restrictions have been lifted, with many saying they’ll continue to use teleconferencing applications such as Zoom. A little over a third of travellers said they would travel the same amount, while only 13% said they would travel more.

This article was originally published on Frank Talk, a blog from Frank Holmes, CEO of U.S. Global Investors.

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