Airline Stocks: Worth The Risk?

Investing in airline stocks is a risky business. The Covid-19 pandemic caused a huge drop in demand for air travel, and while the industry is recovering, it is still facing challenges. These include rising fuel prices due to the conflict in Ukraine, staff shortages, and extreme weather. However, some analysts argue that the current low stock prices present an opportunity for investors.

The impact of the Covid-19 pandemic on the aviation industry

The COVID-19 pandemic has had a significant impact on the aviation industry, causing a dramatic drop in demand for passenger air transport and freight services. This has resulted in financial devastation across the aviation value chain, with all subsectors reporting massive losses, except for freight forwarders and cargo airlines.

Impact on Airlines

The pandemic caused a sudden and large loss of revenue for airlines, as flights were cancelled and planes flew empty between airports. This led to a massive reduction in revenues, forcing many airlines to lay off employees or declare bankruptcy. To conserve cash, some airlines attempted to avoid refunding cancelled flights and tickets, despite government regulations mandating refunds. The pandemic also accelerated the retirement of older, less fuel-efficient, and higher-maintenance aircraft, such as the Boeing 777 and Airbus A380.

Impact on Airports and Manufacturers

Airports and aircraft manufacturers were also severely impacted by the pandemic. With a decrease in flights and passenger numbers, airports experienced a significant drop in revenue. Aircraft manufacturers faced reduced demand for new jets and trimmed production rates, delivering 50% fewer aircraft in 2020 compared to the previous year.

Recovery and Resilience

The recovery of the aviation industry has been slow, with air passenger demand not expected to return to pre-pandemic levels until 2024. To foster resilience, governments have provided support through loans, loan guarantees, wage subsidies, and equity injections. However, the focus has shifted towards preserving business dynamics, allowing non-viable firms to exit, and encouraging investments in sustainability and the green transition.

Changes in Travel Behaviour

The pandemic has also led to changes in consumer behaviour, with a shift towards virtual meetings and video conferencing for business purposes. This may have a long-lasting impact on business travel demand, even as international travel restrictions ease.

In summary, the COVID-19 pandemic has had far-reaching consequences for the aviation industry, causing financial losses, disrupting travel behaviour, and accelerating changes in aircraft fleets and sustainability initiatives. The industry continues to navigate the challenges and adapt to the new realities of air travel.

The risks of investing in airline stocks

High Operational Costs

Airline companies are capital-intensive, highly leveraged, and have high operating costs. Running an airline is not cheap. These high costs are passed on to investors, who may not see a return on their investment for several years, if at all.

Cyclical Nature of the Industry

The airline industry is highly cyclical, with demand typically spiking during the summer months and falling flat in January. This means that investors' returns will fluctuate with these cycles and are therefore highly dependent on the time of year.

Impact of Global Events

Global events such as the COVID-19 pandemic and the conflict in Ukraine have had a significant impact on the airline industry. These events can cause a decrease in demand for air travel and an increase in fuel prices, which can affect the bottom line of airlines as fuel accounts for a significant portion of their total costs.

Competition and Consolidation

The airline industry has undergone consolidation, with a small group of competitors controlling a large portion of the market. This can make it difficult for new airlines to enter the market and compete, and can also lead to increased regulatory oversight.

Dependence on Economic Conditions

The performance of airline stocks is closely tied to economic cycles. When economic conditions are poor, businesses and consumers cut back on spending, including travel. This can lead to a decrease in demand for air travel and negatively impact the financial performance of airlines.

High Risk of Bankruptcy

The airline industry has a history of bankruptcies and failures during downturns. This means that investing in airline stocks carries a higher risk of losing money if the company goes bankrupt.

In conclusion, while investing in airline stocks may offer some opportunities, it is important to carefully consider the risks involved. These risks include high operational costs, the cyclical nature of the industry, the impact of global events, competition and consolidation, dependence on economic conditions, and the high risk of bankruptcy. Investors should carefully weigh these risks before making any investment decisions.

The current state of the airline industry

The airline industry has been one of the hardest-hit sectors during the Covid-19 pandemic, with airlines losing revenue and share prices falling. However, the industry is now recovering, with travel demand surging post-pandemic and airlines adding new routes, hiring pilots, and taking delivery of new aircraft.

Demand and Revenue

Demand for air travel is increasing, with the number of people travelling by plane in 2023 on par with pre-pandemic levels. This has led to a rise in airline stock prices, with the 19 stocks in IBD's Transportion-Airline industry group gaining around 50% in 2023.

Challenges

Despite the recovery, the airline industry still faces challenges, including fuel price volatility due to the conflict in Ukraine and pilot shortages. These issues have led to flight delays and cancellations.

Industry Consolidation

Industry consolidation has created a small group of competitors that are using technology more effectively to manage schedules and set fares. Today, four airlines control about 80% of the US market.

Outlook

The outlook for the airline industry is positive, with the pandemic causing changes in travel demand patterns that could boost the industry for years to come. The shift to "work from home" and "work from anywhere" has created year-round demand for leisure travel, smoothing out the historically cyclical nature of the industry.

However, it is important to remember that the airline industry remains cyclical and is subject to external factors such as economic downturns and pandemics.

Overall, the current state of the airline industry is one of recovery and adaptation to post-pandemic travel demands. While challenges remain, the industry is showing resilience and a willingness to innovate, making it an attractive investment opportunity for those bullish on long-term travel demand.

The future of the airline industry

The airline industry has been one of the hardest-hit sectors during the Covid-19 pandemic, with airlines losing billions due to the outbreak. However, the industry is now looking to recover as international air travel resumes.

Recovery from the pandemic:

The pandemic caused a significant drop in air travel demand and revenue for airlines. However, with the rollout of vaccines, travel demand surged in 2022, and this trend is expected to continue in 2023. As of July 2023, the number of people travelling by airplane is on par with pre-pandemic levels.

Technological advancements:

Technology is playing an increasingly important role in the airline industry. Industry consolidation has created a small group of competitors who are using technology more effectively to manage schedules and set fares. Delta Air Lines, for example, has been a driving force behind innovation, helping to stabilise the business.

Meeting demand for pilots:

The number of active pilots decreased significantly during the pandemic, but growing consumer demand and age-based retirements are expected to drive a resurgence in pilot demand. Airlines and cargo operators need to re-evaluate their pilot training strategies and innovate to meet this demand. Investing in simulator training facilities and e-learning solutions has become crucial in ensuring a sufficient supply of pilots.

Other considerations:

The conflict in Ukraine and the corresponding spike in oil prices have impacted the industry, as fuel accounts for a significant portion of an airline's total costs. Additionally, the shift to "work from home" and "work from anywhere" models has created year-round demand for leisure travel, smoothing out the historically cyclical nature of the industry.

While the airline industry faces challenges, it has proven its resilience during the pandemic, and there are positive signs of recovery. With the right investments and support, the sector can emerge stronger and better equipped to meet new supply and demand scenarios.

The best airline stocks to buy

While some sources suggest that it is not a good time to buy airline stocks, others offer suggestions for those who are still keen to do so.

The consensus is that the airline industry is facing a crisis, with the coronavirus pandemic causing an "unprecedented" situation. Demand for air travel is low, and airlines are struggling to cut costs and reduce cash consumption. However, this could also be an opportunity for investors, with airline stocks selling for bargain prices.

If you are still interested in investing in airline stocks, here are some of the best ones to buy:

• Delta Air Lines (DAL): Delta has a stable balance sheet and strong labour relations, making it a good choice to be among the first international carriers to fully recover. It has also been described as the driving force behind much of the recent innovation in the industry.
• Southwest Airlines (LUV): Southwest has a strong balance sheet and is a favourite among investors due to its ability to remain profitable even when rivals struggle. It is also considered the best-positioned airline over the near term due to its largely domestic and leisure business.
• United Airlines Holdings (UAL): United has large operations catering to Silicon Valley and the U.S. energy sector, as well as a massive network throughout Asia. It has a stable and progressive management team that has modernised its operations.
• Alaska Air Group (ALK): Alaska has a solid reputation as a well-operated company that has outperformed its larger rivals. It has strong partnerships with bigger rivals, giving its customers access to a global network.
• Frontier Group Holdings: Frontier is a discount carrier that offers a niche product, providing very little beyond a seat for the price of a ticket. It is the fastest-growing airline in the U.S. and has a large book of jets on order for future expansion.
• Wheels Up Experience Inc (UP): Wheels Up is a provider of private aviation services in the U.S. through a fleet of owned, managed, and third-party planes.
• SkyWest, Inc.: SkyWest provides scheduled passenger services in North America and the Caribbean.
• Hawaiian Holdings, Inc. (HA): Hawaiian Holdings provides air transportation services and cargo handling between the Hawaiian Islands.
• Ryanair Holdings Plc (RYAAY): Ryanair provides low-fare airline-related services, as well as ancillary, core air passenger, non-flight scheduled, and internet-related services.
• Copa Holdings S.A. (CPA): Copa Holdings provides air transportation services in North America, South America, Central America, and the Caribbean.
• Blade Air Mobility Inc (BLDE): Blade Air Mobility provides air transportation alternatives through a technology-powered and global air mobility platform.

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