In this video, I give a short history of what happened to the airline industry, how airlines are switching to survival mode, and my personal opinion on whether or not it’s a good time to buy.
Spoiler: for some investors IT IS, depending on your strategy.
There are so many variables in this investment decision, and the recent run in prices means you need to be even more cautious. This video covers: Air Canada (AC.TO), Delta Airlines (DAL), United Airlines (UAL), American Airlines (AAL), and Southwest Airlines (LUV).
What Happened to Airlines?
The answer to this question is simple: the world shut down.
When countries around the globe are closing their borders to travel, it becomes extremely difficult to survive as an airline. Airlines are massively capital intensive businesses to start and run, considering they require such expensive assets and their margins are so low. For most airlines, each flight requires around 60% capacity to break even on that flight alone. As pandemic-era governments imposed more strict requirements around distancing and capacity for businesses, most airlines found themselves flying in unknown skies.
Airlines are known to have a direct relationship with the economy of their nation; when times are good, airlines prosper but when times are poor, airlines are often some of the biggest losers around. Within the past economic cycle, however, a mass consolidation has taken place with large airlines merging with and otherwise acquiring smaller businesses to create stronger, more efficient giants.
Will Airlines Survive the Pandemic?
With fewer, stronger airlines around in general, it’s looking likely that the downtrodden businesses currently in the industry are going to weather the storm. After all, governments are going to want to support the industry for their citizens’ sakes, private investments are more likely when fewer options are available, and, frankly, air travel isn’t going anywhere.
Though it’s estimated that pre-pandemic air travel levels are not going to be seen again for years to come, it is expected for them to eventually return. The questions now are:
How long will the recovery take?
Should I get in now?
The answers to these are much more complex. For starters, no one knows how long it will take for pre-pandemic normalcy to return for any industry, let alone if it will at all. Some futurists believe that airlines will come back in a couple of years – others are guessing a decade… this just goes to show that no one can truly predict this. With that in mind, investors looking to get (back) into airlines need to have a staunch belief in the industry and a willingness to wait for an indeterminate amount of time.