Their share prices seem cheap, but is it really time to invest in airlines?
Airlines: is time to invest in airlines?
The airline industry had a bad 20th Century, or so Warren Buffett suggested a couple of years back. "It's true that the airlines had a bad 20th century," he said. "They're like the Chicago Cubs. And they got that bad century out of the way, I hope."
Well, I've got some news. Airlines are having an awful 2020.
But are shares so cheap that the likes of IAG, Ryanair and EasyJet are bargains? Alas, I fear they are not. There used to be an adage about the airline industry— there was no profit in the business.
There was even a book about it: Why can't we make money from aviation, by Adam M Pilarski. Well, with 2020 foresight, we can say the book makes a good point.
Will they regain altitude?
Sure, EasyJet shares are less than a third their price from a couple of years ago. Ryanair shares haven't done quite so badly; they have merely halved from their high point set three years ago. As for IAG, shares are down 70 per cent this year. You could say that makes them cheap.
But consider the underlying forces at work here.
I think there are two reasons why airlines have struggled to make money in the long run. I can think of four more reasons why their prognosis for the next few years is not good.
Why don't airlines seem to make money long-run?
Firstly, there are low barriers to entry. Anyone can create an airline; you just need a few hundred million pounds that you are willing to gamble.
Secondly, governments seem to think it's a matter of national importance that they have their airlines. Therefore, private/commercial airlines are battling against airlines that either have, or have had in the past, direct government subsidies, or they are fighting against airlines that have implicit subsidies — a sense that if all goes wrong, the airlines will be bailed out.
In short, airlines that exist to make money have always competed with airlines that did not have to make a profit as their overriding purpose.
There are four reasons why I don't believe airlines will come roaring back to life once this crisis is over.
The first reason builds upon the above. I had thought that this crisis would lead to a collapse in many airlines, and that post-Covid, the likes of Ryanair and EasyJet would face less competition and thrive. I was wrong. I had not factored in the likelihood of bailing out failing airlines, creating zombie airlines, suffocating the airline market.
The second relates to 'new normal'. The Covid crisis has seen an enormous change in how we work — remote meetings, remote working. There is even evidence that this is leading to increased productivity, less frivolous meetings when nothing is decided, for example. Post-Covid, we will see less business travel. That means less short distance business travel, such as train journeys to work and less medium and long-distance business travel by flight.
The third relates to the economy post-Covid. Unemployment will be sky high — worldwide. It will take time, perhaps several years, before employment returns to pre-Covid levels. That means less money available to spend on holidays.
The fourth is more of a feeling, and I am less sure about this. But post-Covid, we may see a re-set in our priorities — people may gain a greater appreciation for local tourist attractions. As I say, I may have got this one wrong; it is difficult to make objective calls about future attitudes when times are so strange.
If I am wrong about that fourth point, maybe there is a glimmer of hope for airlines later this decade. But even then, the other three factors seem to suggest a very gloomy post-Covid world for airlines.
I gather that Warren Buffett has been selling airline shares for less money than he paid for them. Maybe that says all you need to know.
I would say, instead, for investing purposes, look at the companies that provide the technology to make travel for business purposes less critical.
And in the longer term, say next decade, we may even choose to go on holiday in virtual reality. VR airlines may be the future — flight by avatar when we holiday without leaving our homes.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees