Northwest Arkansas Democrat-Gazette
Airlines see post-covid comeback
Surge by carriers draws investors after cutbacks to survive
Unloved during the pandemic with their business paralyzed almost overnight, airlines that cut back to survive the crisis are now blowing through profit forecasts and luring back investors.
Virgin Australia, so financially frail when covid-19 hit in 2020 that it folded in weeks, has undergone a remarkable transformation under new owner Bain Capital and plans to relist in Sydney. Ryanair returned to profit in the quarter through December and sees no end to its lucrative run. American Airlines has a simpler fleet and focuses on the most profitable flights.
These and other freshly streamlined carriers are capitalizing on a surge in travel since virus restrictions fell away. The International Civil Aviation Organization expects passenger demand to recover to pre-covid levels on most routes this quarter and then to about 3% higher than 2019 levels by year-end.
“Aviation is investable again,” said Jun Bei Liu, a portfolio manager at Tribeca Investment Partners in Sydney. “Asian airlines are going to go through the roof.”
A Bloomberg gauge of 29 airlines from around the world has climbed over 25% since the end of September.
The reopening of China, the largest outbound travel market before the pandemic, should drive a fresh traffic rebound in and out of favored destinations like the U.S., Japan and Singapore. In Hong Kong, hammered by China’s shutdown, Cathay Pacific Airways will this year make its first profit since 2019, according to analyst forecasts.
It’s an extraordinary turnaround for an industry that suffered losses approaching $200 billion over the past three years. Tens of thousands of pilots, flight crew, ground workers and backoffice staff lost their jobs,
while facilities in Californian and central Australian deserts filled up with unwanted aircraft.
Carriers will generate profits of $4.7 billion in 2023, according to the International Air Transport Association. While that’s a fraction of the $26.4 billion airlines made in 2019, key financial ratios indicate the industry is on its soundest footing in years.
The ability to repay debt using earnings, for example, is back to pre-pandemic levels and will strengthen through 2025, according to data compiled by Bloomberg. That means airlines are more able to weather periodic demand shocks, like the one that undid Virgin Australia, and less likely to default.
“Considering the doom and gloom forecast during the pandemic, the industry is doing quite well,” said Volodymyr Bilotkach, associate professor in aviation management at Indiana’s Purdue University and author of the book “The Economics of Airlines.” “Following crises, some airlines emerge in better shape than before.”
The rejuvenation hasn’t been uniform. Norway’s Flyr this month filed for bankruptcy less than two years after starting flying. Days earlier, British low-cost carrier Flybe ceased operations after collapsing into administration.
The failures are more closely aligned with Warren Buffett’s assessment of the industry more than a decade ago. “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money,” the Berkshire Hathaway chairman wrote in an annual investor letter. “Think airlines.”
What’s different now is the huge gulf between limited available seats on aircraft and the public’s strong appetite for travel, which is allowing airlines to supercharge fares.
“The supply-demand dynamics are as different than they’ve ever been in my career,” United Airlines Chief Executive Officer Scott Kirby said on an earnings call last month. “Every data point keeps demonstrating it over and over again. I think margins across the board are going to be higher.”
Reporting record fourthquarter revenue last month, American Airlines Chief Executive Officer Robert Isom said navigating the pandemic had made the carrier more efficient. “This is our best-ever post-holiday booking period,” he said. “We expect the strong demand environment to continue in 2023.”
The demand surge coincides with constrained labor supply. For many passengers, that’s translated into long lines at understaffed check-in counters or lengthy waits at baggage carousels. For investors, it means some of the airlines they own are generating more than twice as much revenue per worker than they were two years ago.
“We will deliver record profits in the current financial year and we would expect to continue to grow profitably into next year and beyond,” Ryanair Chief Financial Officer Neil Sorahan said in an interview.