- Last April, the US government announced a $25 billion support package for the country’s airlines.
- Perhaps no surprise, then, that in August, aircraft engine manufacturer Rolls Royce revealed a huge loss for the first half of 2020.
- In October, aircraft maker Boeing announced sweeping cost cuts.
- And in January, United Airlines reported its fourth quarterly loss in a row.
✍️ Connecting The Dots
It’s no secret that the travel industry’s been decimated by the pandemic: all but essential international travel was halted for most of last year, while domestic trips were nixed by stay-at-home orders. But ever since vaccines were announced in November, investors have started to believe beaten-up travel companies are set for a recovery.
Take airlines: they’ve been battling to win whatever resurgent customer demand there is, simultaneously expanding their fleets and slashing ticket prices as much as possible. One Asian airline is even offering all-you-can-fly deals. Some in the States, meanwhile, are beefing up their bank balances further while they’ve got investors onside: American Airlines began raising $10 billion worth of bonds and loans last week – the most the industry’s ever seen in one go.
Further upstream, aircraft engine manufacturer Rolls Royce was hit by the knock-on effects of reduced travel last year. Airlines ordered fewer planes, which meant there was less demand for Rolls’ engines – leading to a $6 billion annual loss. Still, the company used last week’s earnings update to reassure investors that the worst was in the past, and that it was poised to benefit from a resurgence in plane orders – whenever that may be…
1. Airline stocks could fly this year, but probably not for the long haul.
There’s an old truism that the total free cash flow ever generated by the airline industry is in negative territory. In other words, airlines overall destroy value over time, rather than create it. And not just over a long time either: American Airlines, for one, has burned through almost $900 million of cash in the last six years alone. So even if investors buy into airline stocks in the short term, they might see them as recovery-dependent “tactical trades” instead of long-term investments.
2. You won’t be the first to board airline stocks – just make sure you aren’t the last.
Investors have been expecting a global travel recovery for months, and it’s been reflected in stock market valuations for almost as long. Put another way, if you’re buying into stocks likely to benefit from the recovery, professional investors have beaten you to the punch. That doesn’t necessarily mean there’s no point investing, mind you: you could go along for whatever’s left of the ride, profiting as other retail investors join in and push the stocks up. And even if that doesn’t happen, the income you might make when airlines are able to restore their dividends could make it more than worthwhile.
🎯 Also On Our Radar
Data out on Friday showed the UK economy shrank by less in January than economists had predicted, thanks to the construction and health industries. The country’s still on track to shrink overall in the first quarter of the year, but the data suggests things won’t be as bad as economists thought.