Choppy Skies and Silver Linings—the Airline Sector Amid the Pandemic

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Choppy Skies and Silver Linings—the Airline Sector Amid the Pandemic

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Brian Funk, CFA Richard Davis, CFA, Richard Lee, Kevin Kloeblen, CFA, Leigh Bailey, Julia Gamburg
DEC 17, 2020

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The coronavirus pandemic has caused a widespread and intense shock throughout many regions and sectors and has weakened the global economic outlook. The airline sector has been significantly affected given its exposure to travel restrictions and sensitivity to consumer demand and sentiment.

We believe the key points to focus on during the pandemic and the recovery are industry fundamentals (supply/demand), an airline’s daily cash burn, liquidity and ability to raise capital, and the capacity for the airlines to remove costs from operations to offset the significant decline in demand. Government support has varied in form and by region and has been vital in helping airlines adjust to the pandemic. Multiple airlines have come to market to enhance liquidity, including in some cases issuing debt backed by frequent-flyer programs.

As the pandemic and headwinds continue to unfold, we remain cautious. While the advent of vaccines looks promising and should help to reduce fear of global travel, there are still many unknowns including the timing and success of the vaccine rollout. And although consumers appear to have become more comfortable flying despite the pandemic headlines, short-term COVID-19 resurgence through the winter months, coupled with travel restrictions, could continue to impact passenger demand. While cost initiatives could also help reduce cash burn, they could have a disruptive impact on a potential recovery. Before diving into the airline fundamentals, we provide a brief overview of developments around the vaccine, given the bearing on global travel.