Of all industries hit badly by the ongoing Covid-19 pandemic, there is perhaps none more so than aviation. Who stands to suffer most?
The aviation industry is like a canary in the mines of the global economy. The sector has faced big challenges before, such as after the September 11 attacks and the disruption caused by Icelandic volcanic ash. The impact of the novel coronavirus pandemic, however, is perhaps the industry’s most serious challenge yet.
Key American carriers like United (NASDAQ: UAL), Delta (DAL), and American Airlines (AAL) have signaled that they have taken steps to offset costs and possess cash reserves to weather the COVID-19 storm, but the challenge remains daunting. According to the International Air Transport Association (the IATA), only 30 out of the world’s more than 700 airlines have been driving the improvement in profitability in the sector over the last decade. This leaves some 670 airlines worldwide where the outlook is much less sure should restrictions on international travel continue to drag on.
Natural selection
It is safe to assume that governments will only be willing to bail out those airlines deemed essential to the infrastructure of the economy. National flag-carriers may be at the top of the list for bailouts and loan guarantees. However, with the majority of carriers set to run out of money within two months, this is likely to be cold comfort to those airlines who have positioned themselves as regional or international, particularly if they do not possess large enough cash reserves to get them through this crisis.
Investors should be looking at those airlines that have been amongst the top 30 in driving profitability over the last ten years, which include the three airlines mentioned above, but also the likes of Alaska Airlines (NYSE: ALK), which has been operating at a healthy profit of $798 million, with plans for major expansion prior to the pandemic going global.
Furthermore, Alaska Airlines may be seen as an essential piece of national infrastructure, as it serves to connect Alaska to the rest of the U.S. Another company that the federal government will want to shore up is undoubtedly Boeing (NYSE: BA), a massive employer, and manufacturer of essential equipment. However, not all airlines would be considered an essential infrastructure.
Some airlines particularly at risk:
Frontier is an airline that stands in a risky position. It is currently owned by Indigo Partners, a private equity firm that owns and has stakes in several low-cost airlines in the Americas and Europe. Prior to being acquired by Indigo, their history is one of bankruptcy, mergers, and losses; the most recently available financial data shows that it has been operating at a net income of $83 million, putting them in a precarious position in the current crisis.
In addition to lacking the legacy of an airline like American Airlines, they have been ranked one of the five worst airlines in the U.S. in a study conducted by Embry-Riddle Aeronautical University and Wichita State University in 2015. More recent reviews on the independent airline customer forum Skytrax confirm that this dismal assessment remains salient today, meaning that passengers are unlikely to mourn their passing, should it happen.
Virgin Atlantic
Virgin Atlantic, which is 51% owned by the British Virgin Group and 49% by American Delta Air Lines, has been struck a blow by the closure of borders. The majority of the airline’s fleet has been mothballed until further notice with a skeleton fleet of six aircraft flying primarily to hold onto coveted landing slots at airports like Heathrow and JFK. In the latest available financial reports, the company had been operating at a loss of PS26.1 million ($32.1 million). Furthermore, this could have knock-on effects for Delta Airlines and other members of the Virgin group based in the U.S., such as Virgin Galactic (NYSE: SPCE), the private space flight company.
JetBlue
JetBlue (NASDAQ: JBLU) is another airline likely to struggle. Though it is the sixth-largest airline in the U.S. by the number of passengers carried, the airline is in a poor condition to survive the crisis that Covid-19 represents for aviation. It has been operating at a net loss of $188 million as recently as 2018, and was in negative equity to the tune of $4.611 billion. Like many low-cost airlines, their emphasis has been on filling seats, at the apparent expense of profitability.
Silver Lining?
One possible silver lining is to be found in the data from China. The first hit by Covid-19, China is now the first to recover, with the last of the hospitals built in Wuhan during the emergency in January now having closed. This suggests that, despite gloomy predictions currently being touted about the duration of the pandemic, the worst will pass in a matter of months. With the easing of restrictions on domestic travel, the Chinese aviation industry has likewise recovered, relatively speaking.
According to data produced by the Economist, current domestic air traffic is down only 43% on last year and improving. However, China has a huge internal market for air travel, and the character of the Chinese government is more interventionist than many western governments.
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