Another Body Blow for the Frequent-Flier Class
(Bloomberg Opinion) - Hug the grandparents, party with friends, and go to the beach: Whatever your plans to do, if you've been vaccinated against Covid-19, there's a good chance you'll get on a plane.
According to analysts at Goldman Sachs Group Inc., more than half of Americans and Europeans may have been vaccinated by mid-2021. Some forecasts are not that rosy. However, if the rollout goes smoothly and passengers can show they have been vaccinated, air traffic could gradually recover.
Speed is of the essence, and not just to save lives: European airlines generate most of their revenue in the summer.
However, a recovery in this troubled industry remains prone to setbacks. The new restrictions on flights from the UK, with authorities warning that Covid has mutated to become more virulent, are a reminder. The sell-off of European airline stocks on Monday shows the dangers of investor complacency. More grounded planes during the normally busy Christmas season means less money to spend on repairing the airline's finances.
The break cannot come soon enough. Aside from freight, where limited capacity has resulted in strong prices, 2020 was a miserable year for aviation. And it ends as it began, with an increase in virus cases and tighter lockdowns that have made international travel a trickle. According to the air traffic management organization Eurocontrol, there will be around 6 million fewer European flights in 2020 compared to 2019. That is a decrease of 55%. Even if vaccines are given quickly, air traffic is unlikely to recover to 2019 levels until 2024.
Airline loans have increased to stay afloat. Virgin Atlantic Airways Ltd. and Norwegian Air Shuttle ASA filed for bankruptcy protection to restructure unsustainable debt. Deutsche Lufthansa AG and Air France-KLM shared nearly € 20 billion ($ 24.4 billion) in government support, leading to claims that this aid distorted competition. British Airways owner, International Consolidated Airlines Group SA, was not so lucky. A discounted rights offer had to raise 2.7 billion euros.
Even before the latest travel embargoes in the UK, EasyJet Plc is expected to have flown no more than 20% of its regular capacity in the last three months of 2020. When demand is so low, cost reductions are often not enough to keep airlines out of cash. Lufthansa is bleeding around 350 million euros every month and is expected to cut tens of thousands more jobs. Air France-KLM needs to raise equity to offset its highly indebted capital structure.
Still, investors were keen to look beyond the short-term pain and focus on how vaccines could change the demand for travel. Notably, the shares of Wizz Air Holdings Plc and Ryanair Holdings Plc are back to where they were before their shareholders began fretting over the new coronavirus in February.
These low-cost airlines' finances are in better shape than their full-service competitors and are more oriented towards leisure and short haul travel, which are expected to recover first. (Business trips will likely recover more slowly as companies don't want to endanger the health of their employees.)
But investors may have gotten too complacent ahead of the UK wake-up call this week. Wizz is valued at almost 50 times the future profit.
With unemployment rising in the UK and elsewhere, many people will not have the money to travel in 2021. The lack of international coordination regarding travel restrictions and quarantines continues to be of concern as countries as British are often unilaterally and suddenly discovering new rules that travelers discover on the weekend. No wonder the few customers who still book do so at very short notice, which means that airlines are less able to see future demand.
Vaccinations may be essential for international travel, but even passengers who have their recordings could potentially spread the virus. A combination of preventive measures is likely to stay in place for a while. The governments have cautiously made bitter experiences. The tourists who flocked to Europe's beaches last summer when restrictions were lifted helped spark a second wave of Covid.
Preflight virus testing is widespread, but it hasn't convinced many passengers that it's worth flying. England's "Test and Release" program to reduce quarantine times got off to a chaotic start. Setting up travel bubbles between countries was difficult. There is hope that digital apps and health passports developed by the aviation industry to store virus test results and Covid vaccine certificates will ultimately make quarantines unnecessary.
Airlines and tour operators believe there is massive pent-up demand for travel. Bookings rose sharply this year as European countries lifted restrictions on popular destinations like the Canary Islands. Wizz is particularly bullish. The no-frills Hungarian airline plans to expand its fleet by 30% more aircraft by 2022 than in March. Customers tend to be younger and have to fly to work or visit friends and family.
Nonetheless, the elderly will be the first to receive the vaccine. A travel boom in the over 60s could annoy millennials and Gen-Z travelers who already feel like they're getting a tough deal, but it would be a clear sign that confidence is returning. Just don't expect it yet.
This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist specializing in industrial companies. He previously worked for the Financial Times.
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