Is the Airline Industry on the Road to Recovery?

The airline sector was soaring high and reporting record profits at the start of 2020. Then the COVID-19 pandemic struck, decimating several industries. But the capital-intensive airline companies have been the worst hit. As governments shut down airports and grounded flights, airline companies burnt millions of dollars each day as travel came to a standstill…

According to experts, this crisis is unprecedented and many companies have reported billions of dollars in losses for the June quarter. It might take three more years for air traffic and passenger capacity to reach pre-COVID levels which does not bode well for the sector.

In 2019, the airline industry reported an average operating margin of 7% while net margins were about 5%. We can see that even an 8% drop in sales will push companies towards an operating loss.

According to a Bloomberg report, the International Air Transport Association (IATA), estimates air carriers to lose a cumulative $84 billion in 2020 and another $16 billion in 2021 due to the pandemic. Comparatively, the total losses in this sector during the financial crisis of 2008-09 stood at $31 billion.

The outlook is grim and several airlines might reach out to governments for bailout packages. While lockdowns restrictions are lifted and air traffic has experienced an uptick, the airline industry is grappling with significant debt that stands at a massive $120 billion.

As global travel was non-existent, several companies raised debt to pay their fixed costs and maintain operations. However, rising interest costs at a time when revenues have plummeted will burden company financials and increase the risk of default or bankruptcies.

IATA warns of record loss for airlines

In June, IATA said that the expected decline in passenger revenue has widened to $371 billion, up from its previous forecast of $314 billion in April. IATA CEO Alexandre de Juniac said, “Losses this year will be the biggest in aviation history.  There is no comparison for the dimensions of this crisis.”

It expects losses to account for between 15% and 30% of sales and airlines should brace for a period of extended losses even if there is no second wave of the dreaded virus. IATA also estimates the airline sector to end 2020 with $550 billion in total debt. It indicates debt will be 16 times earnings in 2021, above from just 4.6 times in 2019.

The airline companies will find it difficult to raise fresh equity capital given the ongoing uncertainties and there is a strong possibility that governments will hold equity stakes in multiple airlines to keep them operational.

Warren Buffett dumped airline stocks

When the world’s most famous investor exits an industry, you know there are serious issues plaguing the sector. In April 2020, Warren Buffett-owned Berkshire Hathaway (BRK.A) exited the airline space earlier this year and sold off the entire stake in companies including…

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