Crashes mean little for shares of airlines

Accident severity has a small effect

The last thing anyone should be worried about when an airplane crashes is how much their portfolio might be affected, but the crash landing of Air Canada flight 624 this past weekend in Halifax no doubt had the company’s investors checking the stock as soon as markets opened.

They needn’t have worried. The crash, which thankfully resulted in no fatalities and just minor injuries, caused a modest sell- off in the airline’s share price Monday, but the harrowing event is likely to have little or no impact on the stock moving forward if history is any indication.

“This is a very rare event that will likely be quickly forgotten,” said David Tyerman, analyst at Canaccord Genuity. “The loss on the aircraft is likely covered mostly by insurance so I doubt there will any material ongoing impact.”

Aviation disasters have had a varying influence on the stock prices of both the airlines involved and their rivals over the years, but the timing and magnitude of any loss is often determined by the severity of the incident. Some studies show that investors instantly respond to news of a crash, with shares of the affected airlines losing about one per cent of their value.

Others studies indicate that a crash adversely affects the stock prices of the airline involved because it incurs substantial financial losses during and after such an event, but the impact on competitors depends on whether the crash

This is a very rare event that will likely be quickly forgotten.

provokes the general public’s concern for air- travel safety, or leads them to change airline allegiance.

A 2012 study conducted by researchers at Massey University in Auckland, New Zealand, said airlines experience deeper losses as the number of fatalities increases, while the stock prices of rival airlines also suffer during large- scale disasters, but benefit if the number of fatalities is small.

“For single- digit fatality disasters, the shareholders of the crash airlines suffer immediate wealth losses in the first post- crash week while the shareholders of the noncrash airlines consistently enjoy wealth gains over the entire postevent period, implying the dominance of the ‘ switch’ effect over the ‘ contagion’ effect,” the research paper said.

But all airlines experience significant reductions in equity value when the death toll climbs to double or triple digits, “indicating the ‘ contagion’ effect of the large- scale disasters within the entire airline industry,” it added.

Events over the past week appear to affirm those findings. The horrific crash of Germanwings Flight 9525 on March 24, which killed all 150 passengers, had an immediate and significant impact on most global airlines.

After Sunday’s crash landing, however, Air Canada stock fell less than one per cent, while WestJet Airlines Ltd., its main domestic competitor, traded slightly higher on the day.

But the long- term impact on Air Canada’s shares is expected to be negligible. Instead, the airline and its rivals remain well positioned to benefit from lower oil prices and related consumer demand.

“While yesterday’s events are very unfortunate, it really does not change the investment thesis,” said Greg Newman, associate portfolio manager at The Newman Group, an affiliate of Scotia McLeod.