The aviation industry, which was hit hard by the epidemic in 2020, has begun to show signs of recovery. The U.S. Global Jets ETF has risen nearly 27.9% from the beginning of the year, and the S&P 500 Airline Index has increased by 34.44%. Has spring arrived for the aviation indus

The aviation industry, which was hit hard by the epidemic in 2020, has begun to show signs of recovery. The U.S. Global Jets ETF has risen nearly 27.9% from the year to date, and the S&P 500 Airline Index has increased by 34.44%. Has spring arrived for the aviation industry? Pavel Bilyk, a research analyst at

BCAResearch Investment Consulting Company, told China Business News that as the global vaccination campaign, especially in the United States, proceeds, pent-up travel demand will be released, and the aviation industry will benefit from it. “Since 2012, the S&P 500 Airline Index has moved relative to the broader market in lockstep with the University of Michigan’s Consumer Sentiment Index. As a result, airlines will benefit from improving consumer sentiment. Given the surge in excess savings among U.S. households, as more With more Americans vaccinated, there is a high probability that consumer spending on air tickets will increase again," Billick pointed out.

But the recovery in aviation will be divided by region. According to the Transportation Security Administration, more than 1.5 million passengers passed through domestic security checkpoints in the United States on April 4, compared with 120,000 in the same period a year ago. United Airlines and American Airlines said that currently, the occupancy rate of its flights has risen to about 80%. Meanwhile, as Europe sees another surge in cases and a return to lockdowns, the region's airlines are also concerned about whether they can earn enough revenue to repay debt during the traditional peak travel season.

How much has "hematopoietic ability" been restored?

In 2020, the US airline industry will suffer a total loss of US$35 billion. Since the first round of relief bills was released in March last year, the U.S. federal government has provided $54 billion in grants and loans to the aviation industry to pay workers during the epidemic. But the most difficult period for the US airline industry seems to have passed.

According to US media reports, in order to welcome the rebound in passenger numbers, many US airlines are recalling a large number of pilots who had previously had their jobs cut. On April 5, Delta Air Lines said it had recalled all 1,713 idle pilots. Southwest Airlines said that 209 pilots will end their voluntary leave on June 1 and return to work. United Airlines said last week it would hire 300 new pilots to cope with the busy summer travel season.

United Airlines CEO Scott Kirby said at an industry conference last week that domestic demand for leisure travel in the United States has almost fully recovered. Flight bookings are expected to rise steadily as vaccinations continue.

Does this mean that airlines have continuous "hematopoietic ability" and a new spring has arrived? Billick said: "Airline margins will recover on the outlook for stronger sales and capital stock usage. If margins recover, airlines' forward earnings have room to significantly outperform other markets. In addition, technical and valuation factors Values ​​are still in neutral territory, with outsized upside after last year's plunge "There is room for growth."

Investment bank Jefferies pointed out in a report at the end of March that due to route changes, relatively low oil prices and other structural factors, airline stocks may rise another 70% and the aviation industry will recover to 2019 in 2023. year level. The bank's equity analyst Sheila Kahyaoglu wrote that taking into account factors such as productivity improvements and changes in net debt, the airline's current price-to-earnings ratio under the bull market scenario is 4.3 times, while the historical average multiple is 6 times, which means There is still about 70% potential upside for the entire industry. Bradley Dailey, director of

Alton Aviation Consulting, said in an interview with China Business News that when considering whether airline profit margins will recover after the epidemic, it is important to distinguish between airlines that have gone through the legal restructuring process. Companies and airlines that have not gone through the legal restructuring process. Airlines that are able to use the legal framework to restructure their balance sheets will emerge from the pandemic as leaner businesses with much improved cost structures. Airlines that do not take advantage of the legal framework to restructure may have chosen to rely on short-term cash protection strategies and leveraged government and/or private market participants to provide liquidity. These companies will not have the same advantages post-pandemic."Operators that have boosted leverage and delayed payments to weather the crisis are likely to be hampered by higher cost structures post-pandemic, which could inhibit their return to profitability," Daly said.

"In terms of revenue, yields are expected to be initially lower than pre-epidemic levels as operators strive to stimulate demand. Passenger traffic for the purpose of visiting friends and family and leisure, which is more price elastic, is expected to be the vanguard of the initial recovery. There will also be downward pressure on yields. These negative short-term revenue trends will limit the ability of most airlines to return to the same profit margins as before the epidemic," Daly said. What other risks does

face?

Compared with the United States, the European aviation industry is not so optimistic. Unlike the positive trend at the beginning of the year, although the EU is considering launching a "digital green certificate" similar to a vaccine passport, the resurgence of the epidemic in just a few weeks has gradually dashed the aviation industry's hopes for a rebound in summer travel.

Mike Tildesley, an advisory member of the British government's scientific pandemic influenza modeling group, said in March: "Sadly, for the average holidaymaker, I think it is extremely unlikely that people will be able to travel across the border this summer. "International Travel", the aviation branch of Irish Stock Exchange Advisors and Allied Brokers Goodbody. Analyst Mark Wallace also said: "The national blockades in France and Italy and Germany's growing concerns about infection rates indicate that the second travel season is leaving us."

Daly told China Business News Journalists said the persistence of travel restrictions and restrictions on cross-border travel would be a serious risk for the aviation industry. Measures to restrict traffic have and will continue to reduce airlines' ability to generate revenue, and if these revenue-generating opportunities remain unrealized, many airlines are likely to be unable to continue to exist.

According to European media reports, if travel remains sluggish in the summer of 2021, many European airlines may cease to exist. According to British media reports, many European airlines are already on their last legs financially. British International Airways Group IAG successfully raised US$1.43 billion in a recent bond issuance, but other airlines are likely to need further state bailouts to continue to survive.

Deloitte partner David Gard analyzed that the imminent debt repayment coupled with the low season of income may lead to a very difficult business environment, especially as debt becomes more and more "expensive." "As travel recovery lags, airlines' credit ratings are downgraded and the number of potential collateral assets is reduced. The risk is that if there is too much debt, the business may use free cash for debt rather than expansion, turning the business into a ' Zombies'," Gad said.

In addition, Daly said that because fuel is the largest variable cost item for airlines, the recent increase in oil prices is bad news for the aviation industry. If oil prices continue to rise as the travel recovery gains momentum, airlines will face further cost pressures, potentially hampering their return to pre-pandemic profit margins, a clear risk to airline profitability going forward.

"The biggest risk to airline stocks is the recent increase in oil and fuel prices. Historically, the relative performance of airlines has shown a strong negative correlation with oil prices. However, following deep discounting of fares and rapid growth in travel demand, Airlines have been able to pass on rising energy costs to consumers, so energy prices and the relative performance of airlines still remain positively correlated," Billik told China Business News.