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$JETS - not taking off as we hoped!
What the aviation industry went through last year was unprecedented. This has been longest and strongest shock to the airline industry.
Previous shocks saw RPK (revenue per kilometer) decrease between -5% and -20% and recovery between 6-18months. This shock saw an initial decrease of -90% and we’re still at -60%, 19 months from the start.
Bail-outs
Mid last year I did a spreadsheet based on public information, on which countries / airlines were getting a bail out. 13 out of 45 airlines got some sort of support. There were few more announcements after that.
Since the start of the Pandemic, globally airlines have received $243B in financial aid.
While stop-gap solutions were put in place for many, the overall support was much lower than what was needed.
Debt
So the Airlines turned to the Debt Capital markets. Globally, by the of 2020 airlines raised $125B in debt from the capital markets and an additional ~$100B through Government Aid.
Cash burn
The median cash balances for airlines was estimated to last 8.5months based on H2, 2020 cash burn rates. As of mid-2020, the airline industry was forecasted to burn $50B in cash. Based on forecasts in April 2021, cash burn rate is set to decrease to $10B by end-2021. However, this forecast was before the Delta Variant and I would estimate this to increase, possibly double by the end this year.
Recovery was slow last year but once the vaccine was announced, stock prices started to pick up. But, prices have hardly gone anywhere really and the industry is still struggling. Over 30 airlines globally have gone into administration or bankruptcy.
I’ve marked up the 1 year chart for $JETS below, showing the major events.
What’s next?
- International travel is picking up. But, ticket prices will be significantly higher because global air travel capacity has decreased due to bankruptcies.
- Recovery will be uneven. Many parts of the world are still not safe for travel
- Airlines plan to grow back to 2019 level but now, with a lower cost base
- More airlines are looking for fuel efficiency because of the losses endured the pandemic
- Jet Fuel costs are expected to rise in 2023. While many airlines hedge their fuel prices, a sustained rise in fuel costs will also affect their hedges.
- The consensus is that global travel will not be back to normal until well into 2023 and airlines will continue to see losses in 2022.
The bottom line:
Even with the global re-opening, easing travel restrictions and the pent up demand, we should expect a remarkable improvement in fundamentals for the airlines.
$LUV got downgraded by Goldman Sachs today from Buy to Neutral and a PT of $59 from $63, citing cost pressure, particularly from wages. I suspect we will see more of these, even if their not drastic downgrades.
It will be sometime before we see a full solid recovery.
(Source for Global Stats: IATA)
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