The airline industry has been one of the hardest-hit and most visible victims of the coronavirus pandemic. With authorities urging Americans to avoid non-essential travel, ticket sales have ceased, bookings have been canceled and planes have been grounded across the country.
Major airlines have now requested over $50 billion in bailout funds from the federal government, and while Congress has shown willingness to aid the mammoth industry, airline stocks have lost more than half their value over the past month. All of this is terrible news for airline employees, but some opportunists are wondering whether it’s a good idea to buy airline stock while prices are at an historic low.
So, what should you consider if you’re looking to invest?
A major factor to consider if you want to invest in airline stock right now is whether a company has the balance sheet and accessible cash to survive further financial pain. If an airline was struggling with debt before the pandemic, it is going to be a lot harder to climb out of the hole when the crisis finally passes. Even with the federal government offering its assistance to prevent mass bankruptcies, Congress is not just handing out money for free and airlines will be expected to make good on such loans. Washington dollars may help certain airlines prevail for the moment, but they will still have to find ways to repay debt over time.
To understand this further, let’s look more closely at three companies that are bearing the brunt of the crisis: American Airlines, Delta Airlines, and Alaska Airlines. In 2019, American Airline’s net debt accounted for 65% of its year-end revenue. By contrast, Delta’s net debt made up 31% of its revenue, and Alaska’s net debt was just about 19%.
As all airlines will continue to run deficits through these trying times, the crisis will be a lot harder on companies like American that started the year already carrying weighty debt. In fact, Delta and Alaska are likely to end fiscal year 2020 with less debt than American had at the beginning of the year—before the coronavirus crisis even commenced.
Who Can Repay Debts Fastest?
Another key to identifying a smart airline investment is determining which companies will be able to pay back their debt fastest. We cannot assume that all airlines will recover from coronavirus at the same rate. A number of factors will determine which is first to return to business-as-usual.
Domestic flights, for example, are likely to return to full-speed far sooner than international flights and thus, airlines that specialize in the former, will have a leg-up. Moreover, fare prices that have decreased as a result of the crisis and will likely stay low as people return to domestic flights, though they could return to normal by the time international flights return to the skies. Thus, a domestically-focused, low-fare airline like Alaska will likely return to profitability before massive global players like American and Delta.
With control of the federal government up for grabs this November, it’s hard to predict what kind of sustained assistance the industry will receive from Washington. But while it’s impossible to know for certain how the industry will bounce-back from its present doom, there are definitely safer and riskier bets if you’re looking to buy stock in air travel right now. Net debt at the end of 2019, recovery speed and potential hurdles to returning to normalcy will all determine what makes for a smart investment.