What Will Happen to Airlines After Covid-19?

As airlines struggle during the on-going pandemic, should investors see this as a crisis or an opportunity?

At the beginning of 2020, COVID-19 started to spread around the world. As an increasing number of countries began reporting cases, governments started to close their borders and heavily restrict movement within their countries.

Many airlines, preparing for the usual influx of bookings towards the Spring and Summer, now faced mass cancellations and were forced to deactivate numerous routes. Airplane manufacturers were also in dire straits, as orders were delayed or cancelled and manufacturing was brought to a halt due to lockdowns.

Airline-related stocks registered double-digit losses, some plummeting to prices not seen in several years. While this could be seen as a crisis, some investors see this as an opportunity.

Contents

Taking Flight Again

As Q1 of 2020 ended, the beginning of a recovery was seen in global markets. After the horrific declines during the first three months of the year, April proved to be the best month on Wall Street in more than 30 years, as many companies began to recoup some of their losses suffered due to the pandemic.

The crisis is still far from over, and even as many countries around the world begin to remove lockdown measures, it will still take some time until the airline industry, and the industries related to it, recover completely. Unfortunately, it is also very possible that several companies may go as far as shutting down or going bankrupt.

But the sector is strong, containing some of the largest, most well-established players in the travel and heavy industry segments. As badly as this crisis may have impacted them, there are companies that have weathered the storm and are poised to regain their greatness.

The Planemakers

One of the most familiar companies in the aerospace industry, Boeing’s 100+ years of history show that it has endured the hardest financial crises in modern history. Initially, it was widely believed that the planemaker would seek government aid. However, in late April, Boeing announced that it had independently raised a mammoth $25 billion bond from investors, which would help it maintain stability despite the coronavirus crisis. At the same time, Boeing’s main rival, French company Airbus, also reported losses of $515 million for Q1, 2020 and may seek government aid.

While both companies suffered massive losses, they are most likely here to stay and may resume their previous size and profitability when the crisis is over.

The Airlines

Perhaps the heaviest toll of all during the COVID-19 pandemic was paid by airlines. These behemoths have massive operational costs, even without flying a single plane. It is no wonder, then, that in the US alone, airlines were given government payroll assistance of $25 billion. In total, US airlines faced a decline of an incomprehensible 95% in bookings over the first quarter of 2020.

United Airlines, which is one of the largest airline companies in the US, reported a loss of $1.7 billion in Q1, its largest quarterly loss since the Great Recession in 2008, despite receiving $5 billion in government aid. Delta Airlines, the largest by revenue in the US, took a similar path to that of Boeing, raising $3.5 billion from investors.

However, this crisis also put airlines in a unique position. Many of the airlines’ costs are connected to employment. Airlines’ employees usually have strong unions, which have great leverage over the companies’ owners and managers. Now, their power has been greatly diminished, giving airlines an opportunity to cut costs without employee backlash.

The Black Gold

It is no secret that the world runs on oil, quite literally. However, this has never been more apparent than during the COVID-19 pandemic. All forms of travel were greatly impacted and some were halted altogether, causing a massive decline in demand. Airlines are no exception: The jet fuel needed to power passenger planes is made from crude oil, and airlines normally consume massive amounts. Unsurprisingly, when planes stopped flying, oil demand shrank.

Towards the end of Q1, 2020, the oil market underwent a crisis as never seen before. Diminishing demand and a short-lived price war between Russia and Saudi Arabia pushed oil prices to new lows, causing the commodity itself, its derivatives and the companies that depend on it, to suffer massive declines.

However, eventually travel is expected to return to normal and the passenger jets will need to be refueled. Will this be enough to float oil prices back to their pre-coronavirus levels? Only time will tell.

Investing in Air Travel

The future of the industry is still unclear. Some traders believe that there might be further declines and see this as an opportunity to go short on airlines and airplane manufacturers. On the other hand, some investors believe that the worst is behind us and that this could be a good opportunity to buy airline and planemaker stocks at a significant discount. Since many stocks lost as much as 70-80%, the risk-reward ratio is alluring to many investors if these stocks should regain their previous price levels.

A key factor at least in the near term will be domestic or short-distance travel with most countries borders still being closed. Malaysia has launched several initiatives to encourage domestic travel and the public needs to slowly but surely embrace air travel again.

There’s no sure way of knowing how long the recovery will take and which players will stay in the game once the current crisis is over. It will take at least several months for a coronavirus vaccine and treatments to be developed, meaning airlines will not return to full capacity anytime soon, or perhaps not before the end of 2020. The only certainty is that the airline and travel industries will forever be changed by this crisis.

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What Will Happen to Airlines After Covid-19?