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Analysts think earnings will quickly rebound but the market doesn't share this confidence
Thursday 21 May 2020 Author: Mark Gardner

Cheap prices to buy or lease an aircraft, low bowering costs, cheap fuel prices and reduced labour union membership would normally be music to the ears of airlines. Sadly they are unable to fully take advantage of these benefits as the coronavirus has essentially grounded the airline sector.

Many countries are still in lockdown and have closed their borders. Any passengers still able to travel are likely to face a 14-day quarantine once they arrive at their destination. Social distancing measures in force mean airlines should leave, at a minimum, a third of the plane empty on every flight.

Customer demand has fallen off a cliff and the International Air Transport Association says it won’t recover for five years. However, financial analysts forecast that most airlines will recover all their lost earnings in just a few years. Given how the stock market is forward-looking, is now a good time to buy the sector while sentiment is so poor? Let’s weigh up the facts and consider how the industry might evolve.


This article is the first in a series examining how various sectors could look in a post-coronavirus world, following on from our recent feature where we considered the potential changes for consumers and companies once the pandemic has passed.

To get an idea for how airlines could recover from the current crisis, it’s worth looking at the last two major events to rock the industry – the SARS outbreak and 9/11.

SARS involved the outbreak of a highly contagious and deadly virus. During this period globally airlines lost an estimated $7bn, though most of these were Asia Pacific carriers. Revenue dropped 35% when measured on a per kilometre basis, according to Bloomberg, with international passenger traffic in 2003 taking seven months to recover to levels reached when the SARS outbreak first began.

As for 9/11, a tragedy which shook aviation to its core, demand around the world took three years to return to normal levels, with the massively heightened security measures taking time to get passengers to lose the grip of fear they had about flying again.


Consensus forecasts compiled by Refinitiv for the four London-listed airlines show a big decline in 2020, with the makings of a recovery in 2021 before getting back to pre-coronavirus levels by the end of2022. We’ve excluded Jet2 owner Dart (DTG:AIM) as its earnings forecasts also include a contribution from its land-based distribution business and so don’t tell the full picture for expected aviation trends.

Wizz Air (WIZZ) looks like it could hold up best according to forecasts, with earnings before interest and tax (EBIT) for the year to 31 March 2020 coming in at €409m, before plunging 82% to €74m by March 2021 and then rebounding even higher to €479m in 2022.

For Ryanair (RYA), whose financial year also runs to 31 March, EBIT was €1.13bn in its 2020 results, it is forecast to record a €212m loss in 2021 and then dramatically rebound in 2022 to positive EBIT of €1.20bn.

For the year to 30 September 2020, EasyJet (EZJ) is expected to report an EBIT loss of €578m, before recording an EBIT gain of €221m in the year to September 2021 and €524m in 2022, higher than the €466m recorded in its 2019 results.

As for International Consolidated Airlines (IAG), with its financial year running to 31 December, in 2020 it is expected to report an EBIT loss of €1.3bn. But by the end of 2021, this is forecast to recover to an EBIT gain of €2.5bn, with a roughly 14% increase to €2.9bn by the end of 2022.


At the moment investors remain very cautious about owning airline stocks. The sector has not started to show the levels of share price recovery seen in many other industries.

The market is very worried about the airline sector’s ability to get through the current crisis and so investors are reluctant to take on the high risks of buying shares in this part of the travel and leisure industry.

Analysts expect earnings to rebound sharply over the next two years, yet will airlines survive long enough to experience this financial recovery?

Weighing on sentiment is the fact that world-famous investor Warren Buffett has just sold all his airline shares, sending a message to the market that the sector is toxic.


Wizz Air has remained optimistic in its commentary on the state of affairs and is reportedly prepared to offer very low fares to stimulate the market.

Ryanair also believes there could be another price war this year. In its full year results on 18 May, the Irish carrier said: ‘When airlines return to scheduled flying from July, the competitive landscape in Europe will be distorted by unprecedented quantums of state aid (in breach of EU rules) under which over €30bn has been gifted to Lufthansa, Air France-KLM, Alitalia, SAS and Norwegian among others.

‘We therefore expect that traffic on reduced flight schedules will be subject to significant price discounting, and below cost selling, from these flag carriers with huge state aid war chests.’


The big question mark is whether or not earnings forecasts, even for the seemingly most resilient airlines, are too optimistic? We think so.

The risks are far too high to warrant putting money into this sector at the moment.


There will have to be profound changes to the way we travel, particularly by air, at least until a vaccine for this coronavirus is successfully developed and mass manufactured.

Going through airport security will take longer, while a crackdown on carry-on baggage (to reduce the chances of them coming into contact with other passengers) will mean more checked baggage and the accompanying fees, as well as a slower process of putting baggage through with handles needing to be wiped.

Air fares could go up following a short period of low fares to reenergise the sector, particularly if the middle seat does end up being left empty.

Clearly airlines will have to find a proper way to fill all their seats and not operate on a 67% passenger load factor (how full the plane is) by leaving an aisle empty, particularly given than 77% is the average breakeven load factor for airlines, or roughly 80% for the budget carriers who typically charge lower fares.

Ryanair boss Michael O’Leary says wearing masks can solve this problem, though whether or not that’s true is debatable.

If people in the investment world are correct, in three years’ time aviation will more or less be back to normal. But that’s seemingly based on what we know now. During this pandemic we seem to be learning new things every day.

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