The Industry Still Struggling To Get Off The Ground

Covid might seem like a distant memory, and it barely gets a mention in most boardrooms these days. But there’s one industry that’s still shaking off its pandemic hangover – airlines.

🕰 Recap

• Flagging European carrier IAG finally turned a profit in February after a few turbulent years. Read our story
• Another legacy airline, Lufthansa, is also still struggling, despite reporting its first profit since Covid struck. Read our story
• And on Thursday, US airline Delta announced profit that fell short of expectations, although summer bookings were a bright spot. Read our story

✍️ Connecting The Dots

A tried-and-tested investment tactic is to hunt for firms that’ve suffered a meaningful but temporary blow, where the odds are good for a return to former glory. Wind the clock back a couple of years to when much of the world was emerging from Covid lockdowns and it was a popular playbook in all sectors – excluding those pandemic-era darlings, of course. And it worked like a charm too. Most firms recovered back to – and in some cases way beyond – pre-pandemic profit in no time at all, and their stock prices soared.

Now, this strategy did work for some travel-related firms. Take hotel companies: Marriott and Hilton Worldwide notched record profits last year and their stock prices shot to all-time highs in tandem. But airline stocks have mostly not been able to get off the ground: investors have been keeping their distance even though passenger numbers have ascended nicely, China’s reopened, and airline chiefs have been dishing out rosy outlooks. And there’s one major reason the industry’s stuck on the tarmac – debt.

Let’s face it, the pandemic hit this sector hard, and most firms survived only because they borrowed heavily. IAG has more than six times the debt it had in 2018; Lufthansa and Delta have around 2.5 times. One problem with monster debt piles is that interest payments are fixed costs, making airline stocks more vulnerable to economic weakness than before – and they were already pretty vulnerable. Another problem is that debt repayments are now the No. 1 priority for airline bosses. And that means it’ll be a long time before shareholders see any profit returned to them in the form of dividends or share buybacks.

🥡 Takeaways

1. Luxury always seems to be in style.

The luxury goods industry seems almost entirely unblemished by the past few years. A glance at the stock prices of firms like Hermès or LVMH might have you thinking you’ve missed the yacht. But luxury spending was barely nicked by the pandemic and all its lockdowns, and has been buoyant ever since. And that resiliency partly explains soaring stock prices. Add to that the fact that international travel’s slowly taking off and the high-end Chinese shopper’s now out and about – both massive drivers of luxury goods demand – and it’s no wonder investors in this industry are finding themselves living in the lap of luxury.

2. No Birkin bags under these seats.

“Big bucks” might not be the first thing that springs to mind when you think about flying with low-cost Ryanair, but it might when you think about investing in its shares. Ryanair, which likes to proclaim itself “the world’s favorite airline”, has always done things just a bit differently than its peers. It zigs when others zag, and it’s made some unpopular, austere moves in the interest of keeping airfares low. Now, Covid did wipe 80% off its sales to begin with – this is an airline, after all – but the firm’s financial strength has meant that its debt levels are barely bigger today than in 2019, and analysts are now penning record sales and profit forecasts for this year too.

🎯 Also On Our Radar

Some of the more coherent remarks from an Elon Musk interview this week revealed that Twitter’s taking a step closer to becoming a “super app” with plans to offer stock and crypto trading. Musk also confirmed that most of Twitter’s advertising clients have returned and that the firm’s close to breaking even. But during the meandering discussion, Musk repeatedly suggested his turtleneck-wearing dog’s running the company now. Musk’s not shy about putting the hours in, regularly sleeping in the office, but perhaps it’s time for one or two early nights…