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The airline sector has been hit hard by the COVID-19 pandemic, as travel demand plummeted worldwide. With hopes rising for a possible vaccine, could this be the start of a recovery for airline stocks? Kim Parlee speaks with David Mau, portfolio manager, TD Asset Management.
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American Thanksgiving is usually the busiest time of the year, especially for flying. But that's certainly not the case this year. Here to give us his outlook on what's happening with airlines and what he sees coming, David Mau He's a Portfolio Manager with TD Asset Management. David, it's great to have you with us. I want to talk about the vaccine because obviously that's a big one. We'll get to that. But just for context first, how badly has air travel deteriorated?
- Hi, Kim, yeah, look air travel-- the airline industry was one of the hardest hit sectors going into this vaccine. So when we look at the numbers today, domestic air travel is down somewhere between 65% and 70%. And international travel is down even more, closer to 80%, 90%. So it's been a tough, tough picture for the airlines.
And one thing that I think I should bring up, that's kind of hidden in those numbers, is that business travel is down significantly. So people have become much more comfortable working from home and kind of taking their business meetings virtually. So that's eliminated a lot of the business travel sector, which is important for the airlines because business travel is one of the biggest profit drivers for the airline. Even though it doesn't make up a lot of the volume, it's very profitable. So with that gone, the airlines have been severely impacted.
- Yeah, profitable and predictable, that's a really good point. Let me ask you that-- I know a lot people looking to a government bailout packages for the airlines and what could be coming. How long could the airlines stay afloat without a cash infusion or without some sort of bailout?
- Well right now, most airlines that we're looking at have somewhere between-- let's call it 12 to 16 months of liquidity. So 12 to 16 months of operating cash. Now, like you said, the bailout is still uncertain. But we have had talks in Canada, as recent as last week, about the government coming in to provide some support.
In the US, it's a little bit different. There was some talk of bailouts for the airlines before the election. And then everyone kind of got distracted. And the Republicans and the Democrats can't seem to come to an agreement on what a bailout package should look like. So that's kind of been put to the back burner for now.
- So David, if a bailout was able to come and governments could agree, does it matter what the structure of that bailout is for investors?
- Yeah, I think it does for equity investors. And like you said, we don't know what the composition of this bailout package could look like. I suspect it's going to be coming in the form of some low interest rate loans which would obviously increase the leverage profile on these airlines. And there's also a possibility that the government may actually come in and take an equity stake in individual airlines.
I think for equity investors, you'd probably prefer the loans as a bailout package, as opposed to direct equity because with direct equity, existing holders are going to get diluted right away.
- Let me ask you, I think for some people who watched when the vaccine came out-- the first news of the Pfizer vaccine, we saw Carnival Cruise Lines, we saw all the airlines pop up. So I think with airline stocks down as much as they are right now, is there an opportunity for investors at this point, or what are still the risks right now?
- Yeah, there's several risks, It was great to have that news from Pfizer and Moderna last weekend and this week because that does put a more certain timeline to when activity can fully return. But we have to remember, from what we know right now, the vaccine may not be rolled out to-- and fully implemented to the general public until summer or possibly fall or winter next year. So there's still going to be a lot of uncertainty between now and then.
Now if we look at-- in terms of the opportunity with a longer timeframe lens, say 5 or 10 years, I think there's definitely opportunities now, as long as you're sure you understand that airlines and air travel is not going to go straight up. There will be puts and takes, and ups and downs. But with a 5 or 10 year view, I definitely think that people do want to travel again. And the industry is going to not only grow beyond what it was in 2019, it's going to keep growing going forward.
- David, great to have you with us. Thanks so much.
- You're welcome. Thanks, Kim.
- Hi, Kim, yeah, look air travel-- the airline industry was one of the hardest hit sectors going into this vaccine. So when we look at the numbers today, domestic air travel is down somewhere between 65% and 70%. And international travel is down even more, closer to 80%, 90%. So it's been a tough, tough picture for the airlines.
And one thing that I think I should bring up, that's kind of hidden in those numbers, is that business travel is down significantly. So people have become much more comfortable working from home and kind of taking their business meetings virtually. So that's eliminated a lot of the business travel sector, which is important for the airlines because business travel is one of the biggest profit drivers for the airline. Even though it doesn't make up a lot of the volume, it's very profitable. So with that gone, the airlines have been severely impacted.
- Yeah, profitable and predictable, that's a really good point. Let me ask you that-- I know a lot people looking to a government bailout packages for the airlines and what could be coming. How long could the airlines stay afloat without a cash infusion or without some sort of bailout?
- Well right now, most airlines that we're looking at have somewhere between-- let's call it 12 to 16 months of liquidity. So 12 to 16 months of operating cash. Now, like you said, the bailout is still uncertain. But we have had talks in Canada, as recent as last week, about the government coming in to provide some support.
In the US, it's a little bit different. There was some talk of bailouts for the airlines before the election. And then everyone kind of got distracted. And the Republicans and the Democrats can't seem to come to an agreement on what a bailout package should look like. So that's kind of been put to the back burner for now.
- So David, if a bailout was able to come and governments could agree, does it matter what the structure of that bailout is for investors?
- Yeah, I think it does for equity investors. And like you said, we don't know what the composition of this bailout package could look like. I suspect it's going to be coming in the form of some low interest rate loans which would obviously increase the leverage profile on these airlines. And there's also a possibility that the government may actually come in and take an equity stake in individual airlines.
I think for equity investors, you'd probably prefer the loans as a bailout package, as opposed to direct equity because with direct equity, existing holders are going to get diluted right away.
- Let me ask you, I think for some people who watched when the vaccine came out-- the first news of the Pfizer vaccine, we saw Carnival Cruise Lines, we saw all the airlines pop up. So I think with airline stocks down as much as they are right now, is there an opportunity for investors at this point, or what are still the risks right now?
- Yeah, there's several risks, It was great to have that news from Pfizer and Moderna last weekend and this week because that does put a more certain timeline to when activity can fully return. But we have to remember, from what we know right now, the vaccine may not be rolled out to-- and fully implemented to the general public until summer or possibly fall or winter next year. So there's still going to be a lot of uncertainty between now and then.
Now if we look at-- in terms of the opportunity with a longer timeframe lens, say 5 or 10 years, I think there's definitely opportunities now, as long as you're sure you understand that airlines and air travel is not going to go straight up. There will be puts and takes, and ups and downs. But with a 5 or 10 year view, I definitely think that people do want to travel again. And the industry is going to not only grow beyond what it was in 2019, it's going to keep growing going forward.
- David, great to have you with us. Thanks so much.
- You're welcome. Thanks, Kim.
