Still waiting for the big airline comeback

There’s little doubt that investors see 2022 as being the year that travel gets its mojo back, at least when it comes to Europe.

While US airlines made decent headway in 2021 largely thanks to continued demand for domestic flights, European airlines were hampered by complex travel restrictions which seemed to chop and change with little rhyme or reason.

Omicron’s later arrival to US shores, coupled with investors’ general yips over impending fiscal tightening, have sent US airline stocks into retreat at a time when European airlines are beginning to look a lot more attractive.

European airlines stocks outperform US ones

Source: SharePad

Airlines have high fixed costs and although most have continued to hedge their fuel costs each empty seat weighs on profitability.

European airline bosses have been falling over themselves to shout about the increase in demand, particularly from UK consumers desperate for a little summer sun to soak away the stress of the last couple of years.

Capacity has been upped for those peak holiday months to the popular destinations that offer cheap and cheerful options for consumers still feeling a little cautious about jetting off anywhere too exotic.

Price will be the X-factor and there’s uncertainty about exactly how that will play out. In its latest update Ryanair said it expects its pricing power to increase eventually as capacity on sought-after destinations is stretched, but Wizz Air (WIZZ) boss József Váradi isn’t so sure. He thinks there will be a glut of provision to popular resorts which will force rivals to keep pricing keen.

The profit conundrum

And that’s where the skies look a little less blue. Airlines have high fixed costs and although most have continued to hedge their fuel costs each empty seat weighs on profitability.

It doesn’t matter how many bookings are made, how many flights take off or to how many destinations, it matters how full those planes are and how much each passenger was prepared to fork out for their seat.

Looking at EasyJet’s (EZJ) latest trading update the carrier had been making pretty good headway until Omicron dented confidence just as the Christmas holiday rush should have got underway.

While the load factor (percentage of available seating that has been filled with passengers) had tipped over the 80% mark in both October and November, it plummeted to 67% in December. As revenue rose so did costs and the load factor meant the sums still didn’t add up to a profit.

Getting bums on seats will be crucial for all carriers and already the ticket offers are multiplying. With consumers booking later than they habitually would there is a question as to who will blink first. Are the deals now the best they’re going to be or will those risking a last-minute break emerge as victors?

Global “flight-back” still miles away

Source: IATA

Globally, air travel is a very long way off the levels seen in 2019 and, with many countries still requiring testing, confidence will be slower to return.

For the low-cost summer sun providers 2022 does look set to deliver some better memories than the last couple of years did; indeed TUI’s (TUI) UK managing director Andrew Flintham has said that he expects summer bookings to be back to pre-pandemic levels.

Going forward, if variants don’t cause any more upset, and inflation doesn’t keep too tight a grip on the consumer purse, then businesses like Jet2 (JET2:AIM) and EasyJet will be in decent fettle – the latter has just begun hunting for 1,000 new pilots to bolster its roster as normal service is resumed.

Turbulence ahead for global carriers

But what of those long-haul carriers like British Airways? Globally, air travel is a very long way off the levels seen in 2019 and, with many countries still requiring testing, confidence will be slower to return.

Add in the expectation that business travel will never get back to where it was because of environmental targets, and the surge in the popularity of video conferencing, and there’s a fair bit of turbulence ahead. To that end International Consolidated Airlines (IAG) has already begun plotting. Not only is the British Airways owner embarking on a return trip into low-cost territory, it’s boosting its transatlantic credentials too.

A tie-up with American Airlines to co-locate at a new, improved JFK Terminal 8 from next December will help create onward opportunities, as well as making the Big Apple a more enjoyable stop. Making those premium journeys worth the price tag shows that International Consolidated Airlines understands its true unique selling points, and giving everyone a smoother experience through those airport checks will be a big lure.

Planning and development can’t be put on hold. It’s no accident many carriers have been on an aircraft shopping spree, scenting opportunity to grow. As carriers recover, aircraft manufacturers and the myriad other connected businesses will recover too.

The aviation sector is interesting from an investment perspective, because it remains one of the few industries still to bounce back from Covid. At some point, earnings are going to improve. It’s a question of when, not if.

Unfortunately, the industry continues to be tested to its limits, and high oil prices and a highly competitive market mean the return to profit is not going to be a smooth ride for the sector.

Past performance is not a guide to future performance and some investments need to be held for the long term.