The airlines’ Scylla and Charybdis. Have they missed the sweet spot?
These days, where airlines are concerned, even the good news turns bad. Yes, the predicted bump in demand has occurred as governments put COVID behind them.
But, so far, it's not demand that is the problem. It's supply that's attracted the headlines.
Getting enough aircraft back in the air and on time has been the real killer. Around the world it's attracted enormous public angst, and as always it's mostly directed at the airlines, even if it is as much - or even more - due to airport and airways constraints on recovery.
As a result, for most, even getting back to 2019 passenger levels has been a challenge.
That means they haven't been able to reap the rewards they'd been relying on - while escalating costs make for a need to recalibrate.
Plunging share prices show the market's disillusionment with the industry.
Summary
- Plagued by expansion constraints, airlines may have missed the short window of opportunity to regain financial stability.
- Costs have risen steeply, forcing fares higher. While demand is strong this is tolerable.
- Share prices are near post-pandemic lows for most airlines.
- An uncertain outlook as the northern autumn approaches. Business travel recovery will become important.
Navigating between falling demand and rising costs
As they try to navigate the narrow straits between Scylla, the six-headed cost monster who lives on a rock on one side, and Charybdis, the revenue whirlpool on the other side, the airlines' odyssey looks increasingly troubled.
Delays and cancellations are the issues attracting the headlines, but there are deeper issues of much more concern to airlines.
They may have missed the revenue boat.
It had been important to capitalise on the "post-COVID" demand spike, because there was a narrow window of opportunity before wider economic pressures and the end of the northern summer coincided to slow financial recovery - along with the growing likelihood of a resurgence of COVID as winter approaches.
Cost rises mean fares go up too
The litany of cost headwinds is common knowledge; to name a few, doubled fuel prices, rising labour costs, with strikes spreading (a pilot strike was the last straw for SAS, now seeking Chapter 11 respite), and interest rates are skyrocketing, making debt more expensive.
There's a lot of residual debt washing around in the airline business that's going to need updating, at above the generous rates enjoyed in 2020 and 2021. (In the parallel cruise industry, Carnival Cruises, the biggest of the big four lines that together account for 80% of the market recently paid 10.5% to refinance USD1 billion of its massive debt.)
These factors mean that fares have to rise. Thus far, travellers have been prepared to bear the pain of higher prices, but as belts are tightened, thanks to rising interest rates and inflation, price sensitivity will return.
Losing the opportunity to capture peak levels of revenue during this window means that many airlines will have to confront cash flow issues when travel demand slows in September.
And equity markets are taking stock
This combination of factors has not escaped the attention of the sliding share markets, making equity a precarious proposition now.
Dow Jones' US airlines index is at its lowest point in almost two years and steeply below pre-COVID levels.
Dow Jones U.S. Airlines Index
In Europe it's a similarly unhappy picture, with the index sitting only slightly above the depths of 2020.
STOXX Europe Total Market Airlines INDEX
For previously high flyers like Wizz Air, unhedged and hit hard by fuel prices, the picture is bleaker still; riding high when the recovery began, its share price is now the lowest since floating.
LCCs are hardest hit by costly fuel, although Ryanair is hedged for the time being; after being punished several years ago as fuel rose, the LCC changed its hedging strategy.
Wizz Air Holdings PLC share price
And the full service airlines IAG and Lufthansa are plumbing depths.
IAG Share price 5 years to Jul-2022
Deutsche Lufthansa AG Share price 5 years to Jul-2022
It's an ill wind...Turkish Airlines is a standout
Yet there are exceptions.
With surging inbound tourist traffic paying hard currency to travel to the cheap destinations in Turkey, Turkish Airlines, along with local rival Pegasus, have been standouts as the lira slumps in value.
Turkish Airlines Turk Hava Yollari Share price 5 years to Jul-2022
Outside Europe and North America, some Asia Pacific airlines are however faring better
Despite the slow international recovery in Asia Pacific, several airlines in that region are performing reasonably well - or even extremely well, for a variety of reasons.
Both IndiGo and Qantas have strong positions in their domestic markets
Interglobe Aviation Ltd (IndiGo Air) Share price 5 years to Jul-2022
...although Qantas, with a larger reliance on international, is not performing so well.
Qantas Airways Limited Share price 5 years to Jul-2022
SIA, despite having no domestic market, but with strong government backing and a recovering market, is performing well above its 2020 lows.
Singapore Airlines Ltd. Share price 5 years to Jul-2022
But not all are flourishing.
The region's leading LCC AirAsia, suffering from the closure of China's market, is rapidly diversifying and intent on stabilising operations.
AirAsia.com Capital A Berhad Share price 5 years to Jul-2022
Japan's domestic market is gradually recovering and international is slowly climbing back as restrictions are removed.
See related CAPA report: Connecting traffic is key for JAL and ANA as border restrictions limit visitors
Japan Airlines Co Ltd Share price 5 years to Jul-2022
But Korean Air, moving towards completion of the Asiana merger is looking healthy.
See related CAPA report: Korean Air confident of Asiana merger approvals - next challenge will be integration
Korean Airlines Share price 5 years to Jul-2022
The region's best performer is Taiwan's China Airlines, with plans to expand international routes further.
China Airlines Share price 5 years to Jul-2022
Where to from here? Paradoxically, perhaps a slowing economy can help
Even though few governments outside China are likely to resort again to COVID lockdowns or even restrict border access, it's obvious that the pandemic has more than a sting left in its tail. That will inevitably act as a deterrent for some (or even many) would-be travellers, importantly too, for valuable road warriors, as companies worry about their duty of care.
On the revenue side, as Europe and North America move into autumn and winter, and tourism slows, much will depend on how strongly business travel recovers. Domestically in the US it has climbed to around 50% of 2019 levels, but with large numbers still working from home and steep fare increases for international flights, a broad recovery seems unlikely before 2023 at least.
Airlines must necessarily look for ways to reduce costs, not easy with relatively high employment in many countries, suggesting there will be more industrial unrest.
A slowing global economy, however, might lead to lower oil prices and some stabilisation in supply chain delays, providing some relief. Equally, the industry ought gradually to be able to restore some operational integrity, as conditions become more predictable.
But unless airlines are able in the short term to navigate the treacherous narrow straits between high costs and acceptable revenues there will be more turmoil to come.
Profitability will be an elusive goal for most.
Those temptingly low share prices could become even more tempting.