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Shrinking green list clips airlines’ wings

With Portugal downgraded to amber, carriers’ shares have taken another hit
June 4, 2021
  • England’s dwindling green list spells further difficulty for squeezed airlines
  • Industry leaders have issued strong responses to Westminster’s decision
  • Net airline losses last year were estimated at $126bn

Saint Helena. A remote Atlantic island chosen as the site of Napoleon Bonaparte’s exile in 1815. Also one of the few places still featuring on England’s ‘green list’: a hallowed menu of holiday locations that people can travel to without needing to quarantine on their return.

Under Westminster’s traffic light system, only a handful of countries have made the cut for zero self-isolation measures. That handful became sparser this week. On 3 June, the government announced that Portugal – the nation that had hosted football’s Champions League Final just days earlier – would move to the ‘amber list’. Such a label means 10 days of mandatory quarantine at home, with two Covid-19 tests on days two and eight.

The decision to move Portugal (including Madeira and the Azores) to the amber list follows “increased concern in the spread of variants of coronavirus”, the transport department explained, including a mutation of the Delta variant first identified in India. “The situation in Portugal has required swift action to protect the gains made with the vaccine rollout”, it said.

Changes jar with vaccine progress

Yet the modifications to the travel rules coincided with news that more than half the UK adult population has now received two Covid-19 jabs: a dichotomy not lost on Britain’s leading airline groups as they responded heatedly to the surprise change of tack.

Exacerbating the injury to such companies, no other countries have been added to the green list. The only alterations to the traffic light system were to shift seven more destinations into the no-go ‘red’ zone.

Travel shares in a tailspin

The latest travel reshuffle has, in turn, put even more pressure on the air carriers that had hoped for a European summer revival after more than a year of flattened revenues and squeezed cash flows. Net airline industry losses stood at an estimated $126bn in 2020, according to the International Air Transport Association (IATA).

The market responded accordingly. Shares in easyJet (EZJ), British Airways owner International Consolidated Airlines (IAG), budget carrier Ryanair (RYA) and Wizz Air (WIZZ) all closed down 4-5 per cent on Thursday. Travel and tour operator TUI (TUI) tumbled 4.5 per cent.

Quite a departure from the gains enjoyed by some of those stocks over the year to date – with easyJet’s value rising a quarter between 1 January and the day before the list switch-up.

Strong industry reaction

easyJet had said as recently as 20 May that it was “looking forward to taking customers on a long-awaited holiday this summer” as the largest operator from the UK to green list countries. Such enthusiasm came as the group reported a 90 per cent decline in first-half revenues to £240m. Passenger numbers dropped by nine-tenths and the airline’s load factor (passengers as a proportion of available seats) dropped more than a quarter to 63.7 per cent.

Chief executive Johan Lundgren called the government’s “shock decision” a “huge blow” to those in or planning to visit Portugal. “[T]he government has torn up its own rule book and ignored the science, throwing peoples’ plans into chaos”.

British Airways similarly described the update as “incredibly disappointing and confusing”. “With high levels of vaccinations in the UK being matched by other countries”, the government should not be “turning its back on a traffic light model which we were led to believe was based firmly on scientific data”, a spokesperson said. IAG posted a first-quarter adjusted operating loss of €1.1bn in early May, in a widening of losses of €535m a year earlier.

Meanwhile, Ryanair condemned the UK government’s decision, noting that more than two-fifths of Portugal’s adults have received a Covid jab. Echoing his airline peers, chief executive Michael O’Leary said there was “no medical or public health reason for moving Portugal from the green to the amber list”.

Just a day before government’s Portugal announcement, Ryanair had posted a 0.07m jump in May traffic to 1.8m passengers alongside a 79 per cent load factor.

Smaller carrier Wizz Air said in a statement that it would be cancelling all flights to Portugal. The airline had noted alongside its full-year results on 2 June that it was “cautiously optimistic about the recovery”.

Green does not mean ‘easy’

Even travel to the diminutive green list is not straightforward. Several green countries do not have reciprocal entry rules in place. Moreover, for a number of destinations, travellers must show proof of a negative PCR coronavirus test within 72 hours of flying. Another test must be taken before returning to England. A third test is required within two days of landing. As this writer can attest after a Bank Holiday break, ‘fit to fly’ PCR tests alone can cost £75 each for next-day results.

There are logistical challenges too, from actually arranging the tests to filling in multiple passenger locator forms. That’s before considering the sheer uncertainty involved in booking trips at present. Few will want to find themselves isolating unexpectedly.

The question now is how far the current squeeze should be extrapolated out into future performance forecasts. Liberum analyst Gerald Khoo still believes easyJet, Ryanair and IAG have the balance-sheet strength to “survive a second lost summer”. These three companies, each of which Khoo rates a ‘hold’ and which he notes are not the only airlines to highlight, “were the structural winners before the pandemic and they remain the structural winners afterwards".

“Fundamentally, all of those three airline groups have sound business models, efficient cost bases, strong balance sheets, and that showed through in good financial returns pre-pandemic”, Khoo said. A well-financed airline “is more able to raise capital from private sector sources than an airline that was weak or structurally compromised before”.

Balancing act

Westminster faces an unenviable prospect: balancing the rate of vaccination in the UK with the cautious reopening of the economy. In any case, news this week that the EU parliament has backed a quarantine-free digital travel pass will be welcomed by the sector.

Such an increase was arguably inevitable as restrictions ease. Yet officials will be watching the data to see how far that uptick translates into hospitalisations: a statistic which will, in turn, weigh on the travel sector’s fortunes.

 

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