Anthony Okolie speaks with David Mau, Portfolio Manager, TD Asset Management, about the long-term implications of the coronavirus on the airline industry and the sector’s path to recovery.
- David, how has the airline industry structure changed since COVID-19?
- Well, Anthony, the biggest change is really how quickly the industry has shrunk. We've never seen anything like this in the industry ever, since the beginning of air travel. We've seen capacity come down by 90%, 95% for all of the major global airlines. Tons of jobs have been lost. Airlines are cutting costs. And they're just not buying new planes. Before, this was a growth industry-- a sector that would grow mid to high single-digits every year. And now, it's shrunk very, very dramatically.
- Certainly, we've seen a lot of airlines cut back capacity since COVID. How long before we see domestic and international travel returning to the pre-COVID-19 period?
- That's a good question. And the short answer is, nobody knows. If you listen to some of the airline CEOs and some of the plane-makers, like Boeing and Airbus, they think that it might take somewhere between three and five years for air traffic levels to come back to where they were in 2019. And as you know, it's basically impossible to do any kind of real physical distancing in an airplane.
So I think what we're going to need is to have a vaccine in place before people start to feel comfortable again. And in fact, the IATA, which is the International Air Transport Association, did a survey I think last month, and what they found was that of the people that they surveyed, most people said that it would take them somewhere between two and six months after a vaccine has come out before they would be comfortable getting onto a plane again. So depending on how quickly a vaccine can be found and distributed, we should probably add another six months to a year after that date, and then we can start to see activity recover meaningfully.
- So given all that, what's your outlook for the industry going forward?
- So I think certainly for a period of time, the industry is going to be smaller, just simply because even after a vaccine, some people may not be comfortable traveling. Some people are going to be impacted financially, so maybe they won't be able to travel as much as they would like. And then on the industry side, for the airlines, I think there's definitely a risk that some of these airlines are going to go out of business, particularly some of the lower cost airlines where their whole business model is based on high volumes but thin margins.
Because those volumes have now disappeared, those thin margins are not going to be able to support the business anymore. And then maybe to get back to part of the question you asked earlier, domestic versus international travel-- I think that domestic travel is going to recover before international travel, simply because people are going to be probably more comfortable traveling within the country that they live as opposed to going overseas or traveling internationally where they might not be familiar with the health care system, where they might not know the language. It's going to be a lot more difficult for international travel to recover as quickly as domestic travel.
But I think in the long term, the industry will recover, and we will see growth. It's just a matter of time. And like I said earlier, we don't exactly know how long it's going to take.
- And so, given that, certainly the airline industry has clearly been one of the hardest hit by the COVID pandemic, what's your investment strategy for this beaten down sector going forward?
- Yes, so TDAM-- TD Asset Management-- we haven't been active in the airlines historically. So luckily, we weren't part of the big sell-off in airlines, at least. But any time that an industry or sector sees severe dislocations like what we've seen in the last two months, there are going to be opportunities. So what we're doing is we continue to look at companies with strong balance sheets, companies that are generally considered high quality. And we're trying to look for companies that we know will be able to survive this difficult period. And then when we come out of this, the survivors are going to be in a stronger position.
- David, thanks very much for your time.
- You're welcome. Thank you.