The a​ir transportation sector in the COVID-19 pandemic

31-July-20

The air transportation sector has been hugely impacted by Covid19. In the last five months since the beginning of the lockdowns, the number of flights has been severely reduced. This situation has entailed a huge impact on the airlines, and consequently, it has also damaged the aircraft manufactures and aeroplane lessors. In this report, I want to analyse the main challenges for each one of these industries. Probably the most affected industry has been the airlines. The number of commercial flights diminished from roughly 100k to 25k per day in April, and despite it recovered to 60k/day, the news of a second wave and new lockdowns make the figure to move down (figure below). Estimations from IATA state that it will take 4-5 years to recover the 2019 levels. 

Airlines

Airlines suffered an unprecedented loss in revenue (i.e. American Airlines -86% YoY) and consequently huge losses. Despite reducing the expenses in fuel or maintenance, other expenses remained almost constants (i.e. salaries, aircraft rents, interest expenses). It drove airlines to emit vast amounts of debt as well as ask for rescue programs. Governments in America and Europe has mostly activated these programs.

However, in Asia, the situation is quite different as governments do not want to participate in the rescue, and airlines have to look for private investors to invest in them. In the meantime, we have seen several companies filled chapter 11 such as Aeromexico, Flybe or Virgin. Airlines are trying to reduce their CAPEX and OPEX, delaying the reception of new planes, deferring the lease payments and cutting the number of employees. At the same time, some airlines are transforming their wide-body commercial aircraft in cargo to maximise their utilisation.

In my opinion, we will see some important airlines going bankruptcy, a considerable consolidation in the sector and more companies in which the state will become the main shareholder. The 2Q20 has been tough for airlines, but it is not over yet.

Manufacturers

The two leading manufacturers (Airbus and Boeing) were not at the same starting point when the pandemic outbreak. Boeing came from a horrible 2019 due to the MAX problem. However, both of them have suffered a huge amount of delay petitions from their clients (airlines and lessors). They diminished the production pace for the next 2-3 years (factories working at 60% and a reduction of 10-15% of their employees). However, the positive side of this is that between Boeing and Airbus, they have around 98% of the market share, and it is a sector with high entry barriers. Consequently, it is tough to think that they are going to be out of this business in 5 years.

Aeroplane lessors

The last industry I would like to talk about is the aeroplane lessors. Lessors have around 40% of the total 25’000 aeroplanes’ universe. Maybe the most known are Air Cap, GECAS and Air Lease. Fortunately for them, they have arrived at the crisis in low multiples of debt. Also, they get paid for leasing the aeroplanes,so it does not matter whether the airline is using it. They have contracts from 5-8 years traditionally. On top of that, airlines are retiring their older planes. Consequently, the universe of aircraft is diminishing, and lessors can have an interesting role during those coming years of uncertainty.

However, there are some problems related to this business. Some of the lessors lease the aircraft to low-cost companies. These companies are going to go into troubles easier than the flagship airlines, and they may be not have the support of their government as they are not the leading airline in the country. Moreover, as there is less demand for planes, the cash flows that the lessors can obtain from their assets diminishes, and there are impairments. In addition to that, the vast majority of their clients are asking for deferrals, and there is a high possibility that in some cases, it takes years to receive those payments.

The air transportation sector is going through an even worse situation than it went after the 9/11 because of Covid19. There will be interesting opportunities as it is difficult to imagine that this pandemic will be the end of the sector. However, it will be ups and downs during the way, and it is essential to understand the context before making any investment decision.

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