As countries re-open their borders and people start to travel again after covid, a key sector that is overdue for recovery is air travel. No country and indeed no airline was spared from the lockdown and the resulting revenue losses. Now, a few key questions need to be answered.
1. Which airlines are still viable candidates to recover? On what basis?
2. Will post-pandemic travel behaviour change? How so?
3. What strategies will airlines employ to recover back to profitability?
4. Which airlines will survive and become profitable?
5. Based on this which airlines are best investment candidates?
Let's tackle each of these questions one by one based on data that is available.
Our analysis will be limited to the following airlines
1. United Airlines
2. Singapore Airlines
3. American Airlines
4. Delta
5. South West Airlines
6. Virgin Atlantic
7. Lufthansa
8. Air Canada
As can be seen from the above list, we have a mix of different airlines. We did not find much information on Virgin so we had to drop it. Here is a quick comparison of Revenue and Net income for these airlines for Trailing Twelve Months of 2021 and FY 2019.
| United Airlines | Singapore Airlines | American Airlines | Delta Airlines | South West Airlines | Lufthansa | Air Canada |
| Ticker symbol | UAL | SINGY | AAL | DAL | LUV | DLAKY | AC.TO |
| Total Revenue TTM | 14.59 | 3.8 | 18.86 | 18.3 | 9.86 | 9.7 | 3.15 |
| Total Revenue 2019 | 43.26 | 15.97 | 45.7 | 47 | 22.42 | 36.42 | 19.1 |
| Net Income | -5.53 | -4.2 | -5.8 | -6.7 | -1.6 | -5.6 | -4.3 |
| Net Income 2019 | 3 | 0.6 | 1.68 | 4.76 | 2.3 | 1.2 | 1.47 |
| Revenue TTM / 2019 % age | 33.73% | 23.79% | 41.27% | 38.94% | 43.98% | 26.63% | 16.49% |
| Costs as %age of TTM revenue | 137.90% | 210.53% | 130.75% | 136.61% | 116.23% | 157.73% | 236.51% |
| 2019 Costs as %age of 2019 revenue | 93.07% | 96.24% | 96.32% | 89.87% | 89.74% | 96.71% | 92.30% |
On the whole these airlines are carrying 25% to 40% of 2019 traffic. Airlines with more International travel such as Singapore Airlines are < 25% of revenue and more domestic airlines such as South West are > 40% revenue.
On the other hand, Singapore Airlines Net Income in 2019 was a mere 0.6 B. South West who has the highest Net Income comparatively speaking (- $1.6B), had $2.3B revenue in 2019. Prior to covid, South West had the best handle on its cost (89% of revenue).
If we look at International Travel alone, the following table provides a breakdown of origin and destination across markets and their percentage share of Revenue Passenger KMs
| Africa | Asia | Central America Caribbean | Europe | Middle East | North America | South America | Southwest Pacific | Total |
| Africa | | 0.4% | | 4.3% | 1.6% | | | | 6.3% |
| Asia | | 8.5% | | 8.4% | 7.6% | 5.7% | | 3% | 33.2% |
| Central America Caribbean | | | 0.3% | 3.8% | | 4.6% | 0.7% | | 9.4% |
| Europe | | | | 21.1% | 5.5% | 8.9% | 2.3% | | 37.8% |
| Middle East | | | | | | 2% | | | 2.00% |
| North America | | | | | | | | 1.3% | 1.3% |
| South America | | | | | | | 0.7% | | 0.7% |
| Southwest Pacific | | | | | | | | | 0.0% |
| | | | | | | | | 90.7% |
Asia and Europe account for almost 70% of revenue KMs split between them.
Post-pandemic behaviour change
This is the hardest puzzle to solve. Traditional wisdom would suggest that post-covid, domestic travellers would choose personalized mode of travel compared to air travel. Also, given that the pandemic has proven that business can be done across a screen, people will no longer be interested in traveling short distances by air for business.
However in many unrestricted markets, domestic air travel has resumed and reached pre-pandemic levels.
As can be seen from the above graph, domestic travel in US and China has is only 10% away from 2019 figures. Globally, the gap is only 15% in terms of Revenue Passenger KMs.
The above figures should not be taken at face value, as the increased domestic travel includes pent up demand due to lockdown. We can assume that many segments such as business and conference travel will not resume to the extent as it used to be.
International travel has definitely not recovered to the same extent. We can assume that this recovery will be slow over the next few quarters.
Overall, it looks like domestic airlines in US and China who have limited international exposure should be doing fine, and are perhaps closest to recovery.
| World share | RPK | ASK |
| Total Market | 100% | -53.10% | -45.20% |
| Asia Pacific | 38.60% | -62.70% | -54.10% |
| Europe | 23.70% | -56.50% | -46.50% |
| Latin America | 5.70% | -44.50% | -40.50% |
| Middle East | 7.40% | -73.20% | -57.50% |
| North America | 22.70% | -28.50% | -24.70% |
| | | |
| International | 45.80% | -73.60% | -63.80% |
| Asia Pacific | 10.90% | -94.20% | -86% |
| Europe | 18.60% | -64.20% | -53.80% |
| Latin America | 2.20% | -66.30% | -60.50% |
| Middle East | 7% | -74.50% | -59.50% |
| North America | 5.40% | -62.10% | -52% |
| | | |
| Domestic | 54.20% | -15.60% | -10.70% |
| Australia | 0.70% | -75.40% | -61.00% |
| Brazil | 1.60% | -19.60% | -18.00% |
| China | 19.90% | -2.50% | 6.20% |
| India | 2.10% | -59.40% | -47.10% |
| Japan | 1.40% | -53.90% | -36.10% |
| Russian Fed | 3.40% | 28.90% | 34.80% |
| US | 16.60% | -7.70% | -7.10% |
Looking at just the US carriers, we can see that with the exception of South West, everyone else is waiting for travel to resume.
| Q2 2021 | Revenue Passenger Miles (RPM) | Available Seat Miles (ASM)
| Passenger Revenue per Available Seat Mile
- PRASM (cents) | Cost per Available Seat Mile - CASM (cents) | Profit (cents) |
| South West | 27689 | 33414 | 10.68 | 10.22 | 0.46 |
| United | 28514 | 39613 | 11.02 | 14.49 | -3.47 |
| AAL | 42022 | 54555 | 12 | 12.9 | -0.9 |
| Delta | 33285 | 48529 | 11 | 14.43 | -3.43 |
Adding the international carriers and translating everything to KMs, we get the following results
| Q2 2021 | Revenue Passenger KM (RPK) | Available Seat KM (ASK) | Passenger Revenue per Available Seat KM - PRASK (cents) | Cost per Available Seat KM - CASK (cents) | Profit (cents) | Profit (% age) |
| South West | 44,302 | 53,462 | 6.7 | 6.4 | 0.3 | 4.5% |
| United | 45,622 | 63,381 | 6.9 | 9.1 | -2.2 | -23.9% |
| American Airlines | 67,235 | 87,288 | 7.5 | 8.1 | -0.6 | -7.0% |
| Delta | 53,256 | 77,646 | 6.9 | 9.0 | -2.1 | -23.8% |
| Lufthansa | 14,034 | 27,317 | 7.0 | 12.4 | -5.4 | -43.8% |
| Singapore Airlines | 1,857 | 12,571 | 2.5 | 7.3 | -4.8 | -65.8% |
| Air Canada | 2,699 | 6,400 | 5.3 | 24.3 | -19.0 | -78.3% |
As we can see from the above table, only South West airlines in the above cohort looks to be recovering their costs. The remaining airlines are operating at losses, sometimes quite significant at that. The international carriers and Air Canada are the worst off.
An important point to highlight that Lufthansa, Singapore Airlines and Air Canada despite being worst off are being supported by their respective governments. So their long term viability is not in question, but they are likely to remain in the red the longest given their high cost structures.
What strategies will airlines employ to recover back to profitability?
Already, airlines have started making changes to different aspects of their strategy. Airlines that have the option will need to focus on domestic or international cargo markets. US carriers with high Available Seat Miles (ASM) are expanding their operations to include smaller destinations, and also more equitably distributing their fleet. Again, South West seems to have the least idle capacity.
Staff salaries are the biggest component of an Airlines expense closely followed by fuel and fleet maintenance.
