Airlines facing a long haul despite a "surge in bookings"

There were mixed messages in April’s air traffic data from the International Air Transport Association (IATA). The industry body has returned to year-on-year traffic comparisons, unless otherwise noted. Whether this denotes that industry expectations for a near-term recovery have improved is unclear, but it should help determine the strength of the rebound as the virus loosens its grip.

In the previous monthly update, the IATA said that it expected that overall traveller numbers would reach 4bn in 2024 (counting multi-sector connecting trips as one passenger), thereby exceeding pre-pandemic volumes by three percentage points. That remains someway off in the distance, although any investors with exposure to the sector will be gratified by the latest headline figures, caveats notwithstanding.

Global passenger volume increased by 78.7 per cent year on year through April, although it still trails the pre-pandemic rate by 37 per cent. More pointedly, capacity remains well adrift of the 2019 rate, so the corresponding recovery in the load factor needs to put in context. The percentage of available seating filled by passengers is nudging the pre-crisis winter-season rate, although the effective size of the capacity is still significantly smaller than they were in 2019.

Looking ahead, much rests on the shape and severity of government-imposed travel restrictions across the globe. China’s recent – some might say ill-judged - ‘zero-Covid’ restrictions provide a case in point. Domestic air traffic in China fell to 80 per cent below the 2019 level in April, a shortfall not seen since the first quarter of 2020. Investors in the sector will be hoping this represents a one-off setback as much of the projected long-term growth in air travel rests on Asian markets.

April’s figures certainly provided a tonic for investors in European carriers. The IATA report details a 480 per cent increase in international traffic compared with the 2021 comparator, while capacity was 234 per cent in advance of the April 2021 rate. That meant that the load factor increased by 33.7 percentage points to 79.4 per cent.

Willie Walsh, IATA’s director general, said that the marked improvement in numbers reflects “the long-expected surge in bookings as people seek to make up for two years of lost travel opportunities”. You suspect that many investors would concur with his comments based on anecdotal evidence alone. Unfortunately, many national governments, including that of the UK, have been reticent to rule out further lockdowns if more deadly coronavirus variants emerge. Leaving clinical issues aside, it’s not as if industry valuations haven’t previously headed south due to other leftfield events, most infamously the 2001 terrorist attacks on New York City and the US Pentagon, but also events such as the Gulf War and the 2010 volcano eruption in Iceland. Airlines are disproportionately vulnerable to external shocks.

On a more prosaic note, the rate of recovery in overall traveller numbers could slow appreciably if discretionary spending continues to wane. And it has become a rather more extravagant affair to simply keep your fleet in the air. The S&P Global Platts jet fuel price index has more than doubled since last June, further impeding the industry’s return to profitability. Stock pickers looking to ride the nascent recovery in traffic volumes would be well advised to consider the extent of dollar and jet fuel hedging undertaken by any of the carriers they are analysing.

Perhaps the main question is whether the sector is worth considering at all? No less a figure than Warren Buffett has previously warned against investing in this space and taken hefty losses after ignoring his own advice. As part of the wider aviation complex, the global airlines sector (excepting cargo carriers) was the hardest hit by the pandemic, faring much worse than industry manufacturers, freight forwarders, or even the airports themselves. Analysis from McKinsey indicates that the airlines accounted for 73 per cent of the $230bn (£189bn) in estimated aviation losses through the pandemic. But not all problems are linked to Covid-19. It’s a capital-intensive industry, although highly competitive due to surprisingly low barriers to entry, effectively reducing the airlines’ negotiating power as part of the global aviation value chain.

However, there are some chinks of light. Reuters is reporting that the US is to drop pre-departure international testing requirements, so it is conceivable that other national governments could swiftly follow suit. Although we would be reluctant to pitch the airline sector as a ‘buy-and hold’ option, an active trading strategy could unlock value. Industry index values have retraced significantly since their five-year trough in May 2020, but there is still upside in prospect.