AIRLINE STOCKS TAKE FLIGHT: But turbulence still likely ahead

Investors have seemingly cleared airline stocks for takeoff – a sign that bodes well for the health of the travel sector – but the industry still faces a long and bumpy climb as the uncertainty of the pandemic and economic recovery remains.

In the US, the S&P 500’s airline index, which includes American Airlines and other major carriers, has jumped nearly 25 percent so far in 2021 as vaccine distribution ramps up and begins to clear the way for a full economic recovery. The gains are outpacing the broader S&P 500’s 3 percent rise, marking a sharp reversal from last year when airlines lost up to half their values.

In Canada, Air Canada’s share price has been similarly rising steadily since its 12-month low of $12.15 per share on March 19, 2020. Last Friday (March 12), the stock peaked at $29.72 on growing speculation of imminent federal bailout for the airline.

(WestJet is no longer listed since being purchased last year by the private Onex Corp.)

However, the gaudy gains may not last, warn analysts, who point out that airlines won’t likely return to their pre-pandemic revenue and passenger levels for years.

And even after much of the world is vaccinated, leisure travel could be slow to recover, while business travel could take even longer as companies continue to conserve cash and use video-conferencing technology instead of spending money on flights and hotels for employees.

“A lot of those stocks are still embedding fairly optimistic assumptions,” says Mark Hackett, chief of investment research at Nationwide. “The idea we’re going to return to normal anytime this year seems awfully optimistic to me.”

Demand for business travellers, the most lucrative passengers for airlines, will likely take years. Meanwhile, many airlines will have to keep burning more cash while keeping a close watch on costs and debt.

“Business travel spending reached $1.43 trillion in 2019 and swiftly fell to $694 billion in 2020 according to the Global Business Travel Association. It foresees a slow recovery and spending won’t reach pre-pandemic levels until 2024. Business travellers can account for more than half of passenger revenue, depending on the airline.

“Given the dearth of demand, especially business travel, cost reduction is paramount,”’ said a report by Airlines for America, a trade association and lobbying group for the industry.

The group doesn’t expect overall passenger volumes to return to pre-pandemic levels until at least 2023. A more pessimistic forecast puts that recovery out past 2024. Airlines have had to burn through cash to make it through the slump.

While Canadian airlines appear to be edging closer to federal support, airlines in the US are set to receive another lifeline with a third round of payroll support and other funds. Government support, including loans, helped the industry retain employees and offset some of its spending on operations. Airlines were barred from laying off workers for six months last year as a condition of up to $25 billion in federal payroll assistance. Congress retroactively approved another $25 billion in aid in December.

Legislation pending in Congress would give airlines another $14 billion to cover about 60 percent of their payroll costs and bar layoffs through September.

Airlines are also finding other ways to raise money during the recovery. American Airlines recently announced plans to raise $7.5 billion by borrowing against its frequent-flyer program and using the funds to pay off a federal loan that it received nearly a year ago. It follows similar moves by Delta Air Lines and United Airlines.