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Coronavirus: when will airlines recover?

Emma Rapaport  |  30 Mar 2020Text size  Decrease  Increase  |  
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The impact of the coronavirus on the airline industry has been swift and severe. Travel bans have forced airlines to slash capacity, temporarily lay off staff and cut capital expenditure.

Load factors – a metric which refers to the percentage of bums on seats – have fallen well below analysts' expectations. United Airlines management anticipates load factors could fall into the 20 per cent - 30 per cent range if demand trends don't worsen; the firm's recent full-year load factors have been in the low 80s.

However, analysts doubt the disruption will affect long-term global travel, and that the shock to the travel industry will be temporary. They expect the airline industry will start recovering on pent-up demand by the end of the year.

"We continue to believe that once coronavirus fears fade, air traffic will improve and could overshoot normalised demand for a period as pent-up demand (for example, postponed family vacations or business conferences) is released," Morningstar analysts say in a special report on the coronavirus, its effect on markets, and which stocks are worth looking it.

"So, despite weak short-term earnings, we anticipate the travel downturn to be short-lived and firms with strong balance sheets to be able to weather the storm.

"We anticipate a U-shaped impact on demand from COVID-19, similar to the shape of the impact experienced during SARS in 2002, and forecast a return to capacity growth from early calendar 2021."

While it’s still early, this has already begun happening in China. "The Chinese carriers began to see traffic bottom in mid-February with fewer flights canceled," analysts say.

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"Assuming the conditions in China continue to stabilise, we expect domestic passenger traffic to bounce back to 2019 levels in the third quarter of 2020."

Longer-term, analysts expect growth in the Asian middle class to drive relatively strong passenger growth. In the meantime, they say Australian and New Zealand national carriers Qantas (ASX: QAN) and Air New Zealand (NZE : AIR) can also offset the impact.

"At these airlines, we anticipate labour costs, which make up around one third of their operating costs, are largely fixed, weighing on profitability," they say.

"However, they do have levers to pull to reduce the impact, including executive pay cuts, hiring freezes, and voluntary leave for employees."

"We expect the reduction in fuel bills—both from lower consumption due to cuts in capacity and the lower jet fuel price—to offset some of the impact. It has helped that crude oil prices have halved since the beginning of 2020."

Airports in Sydney (ASX: SYD) and Auckland (NZE : AIA) are also facing weaker revenue from lower passenger volumes and depressed retail revenue. Analysts anticipate that capital-intensive projects, such as building new terminals, may be postponed to free up cash flow and help the airports service their debt obligations amid lower revenue.

Dig deeper:

Morningstar's special report 'Coronavirus: Market Temperature Check; Don't rush to check-out; stock up on quality companies' highlights 10 stock picks for each of the four main regions that equity analysts cover: North America, Europe, Asia, and Australia and New Zealand, including names in travel and leisure.

The report also highlights Morningstar's base view on the long-term economic impact of COVID-19.

Morningstar Premium members can access the full report here.

Or take a free trial to Premium and receive instant access.

Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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