Reasons for Optimism In This Hard Hit Industry

Of all industries decimated by the COVID-19, Airlines in Australia may well be the hardest hit.

The catastrophic effect of international border closures cut almost all revenue for airlines in this business segment, however, Australia’s lockdown is particularly unique, with a number of states also closing their borders to interstate travelers – also causing a drop in domestic flight passengers by 94% compared to the same period last year.

The first casualty of the pandemic occurred when Virgin Australia (ASX:VAH) entered voluntary administration on the 21st of April after years of running on paper-thin margins – evident in how quickly the company sunk after the travel shutdown.

However for the airlines that were able to weather the storm through unprecedented lockdowns, that bit by bit are starting to ease around Australia and New Zealand, there is opportunity for up-and-comers to eat away at some of Virgin’s previous market share (as they are expected to return a much smaller operation when a settlement is reached).

There is no better example of this than Regional Express Limited (ASX: REX) who have already capitalized on this opportunity by leasing six Boeing (NYSE:BA) 737-800s, previously controlled by Virgin. These are now the largest planes in the fleet of REX, who previously only operated small aircraft on regional routes ignored/scarcely serviced by QantasLink or Virgin. REX intends to disrupt the market by flying these planes on the Melbourne – Sydney route, the second busiest air route in the world. They are well-positioned to undertake this strategy with a strong balance sheet and low debt – geared at just 9.50% (Compare that with QANTAS who are ridiculously leveraged at well over 500% D/E).

Alliance Aviation Services Ltd (ASX:AQZ) also services the remote and regional towns of Australia and is one of the rare airlines that saw growth in both income and profit in FY2020. The business model of AQZ is uniquely resistant to tourism downturns as most of its services are provided for Fly-IN-Fly-OUT workers in Australia’s enormous minerals extraction industry. Alliance also has a well-built balance sheet and a liquidity position significantly better than any other airline on the ASX.

Whilst Qantas Airways (ASX:QAN)absurd leveraging is enough to deter a risk-averse investor like myself, there is growth potential for Qantas when the international borders re-open, as Qantas should expand its share in the international market due to the collapse of Virgin. This may be hindered by the fact that Qantas is also undertaking a downsizing of its operations by discarding 100 planes and making 6000 employees redundant. Short term cash inflow may be able to be maintained through its QantasLink regional service that services the FIFO market.

If as an airline investor you prefer to invest in flag carriers due to the preference and privilege it attracts from the jurisdiction it serves, Air New Zealand (ASX: AIZ) is in a much healthier financial situation than Qantas. Whilst it is still rather leveraged (D/E over 200%), most of this debt is held with the Government of New Zealand who is also a majority shareholder in the airline. New Zealand’s strong performance in combatting the COVID-19 virus should allow Air New Zealand to recover quicker from the shutdown as New Zealander’s begin to resume leisure travel domestically and soon travel to Australia.

As Australia slowly begins to open up, and the COVID crisis in Victoria continues to ease, there is certainly an opportunity for growth in an industry that was crippled like no other – and up and coming airlines seem better positioned for this than the major players that have dominated the Australian Airline market since the downfall of Ansett in 2002.

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additional readings / sources

https://www.bitre.gov.au/sites/default/files/documents/domestic-aviation-activity-publication-april-2020.pdf

https://airshare.com/blog/australian-aviation-coronavirus/

https://www.aljazeera.com/economy/2020/6/25/qantas-to-cut-6000-jobs-ground-100-planes-due-to-coronavirus