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WITH THE HOPE that their season in hell may be ending, airline stocks are in a tumble.
Shares of Singapore Airlines Ltd. rose the most in 21 years on Tuesday, while those of Cathay Pacific Airways Ltd. rose the most since 2008 after Singapore and Hong Kong announced the opening of a travel bubble from November 22.
News of successful trials of a coronavirus vaccine from Pfizer Inc. and BioNTech SE pushed the Bloomberg World Airlines Index as high as 9.7% on Monday in anticipation of an ebbing pandemic tide.
The cavalry better come soon. Right now, much of the industry is running out of rations.
With a 73% drop in traffic from the previous year in September, and international flights operating at just 12% of their levels a year ago, the usual path for companies to get cash by earning a margin on their revenue remains blocked. .
That could remain the case well into next year, given likely bottlenecks to producing and distributing vaccines in sufficient quantities to reopen international travel.
Still, there is more than one way to provision your army. If you can’t sell airline tickets, you can still try everything else that is not defined.
The first thing companies try to sell in a crisis are pieces of paper. Airlines have issued $ 88 billion in bonds so far in 2020, more than half of the $ 153 billion the industry sold in the previous four decades combined, according to data compiled by Bloomberg. Add in the value of loans taken and total airline debt has risen by $ 124 billion since the end of February, the data shows.
It’s a similar picture on the equity side.
Japan Airlines Co. announced plans last week to raise as much as $ 1.6 billion by issuing shares equivalent to about a third of the existing record.
Singapore Airlines’ $ 6.5 billion rights issue in June represents the largest additional capital raising by any airline in history.
The $ 27 billion in new shares issued by the industry as a whole this year is equal to all the cash raised through that route over the previous six years combined.
Together, all of the new debt and equity sold by the world’s airlines this year amounts to nearly two-thirds of the $ 241 billion that the International Air Transport Association expects the industry to raise in passenger revenue throughout the year.
Companies that own fleets of high-value transportation equipment also have other ways to get cash. EasyJet Plc raised $ 170 million this month by selling and leasing 11 of its jets to airplane leasing companies. Last month, Air Canada received $ 365 million from a similar move, and Wizz Air Holdings Plc and United Airlines Holding Inc. followed suit.
The fundraising effort has been titanic. Compare the revenue of some of the world’s largest airlines in the most recent quarter with their cash flows from finances and investments, minus the capital expenditure that airlines generally have to commit well in advance, and you can see the big picture clearly. :
In general, airlines should see cash outflows from finances and investments offset by an inflow from operating activities. That’s what you have with Chinese carriers, who have returned to a semblance of normalcy in recent months with the suppression of Covid-19. However, in other parts of the world, working the balance sheet has often generated more money than selling transportation services.
You may regard that flexibility as a hopeful sign, but as we’ve argued, a miserable third quarter is likely to lead to a bleak winter for airlines. There is likely much more to come in terms of bankruptcies and restructurings. Getting the industry out of its Covid-induced debt burden could take the better part of a decade.
Furthermore, while air passenger demand for tickets is a more or less inexhaustible resource, there are a limited number of assets that a carrier can sell and lease before they are exhausted. This year’s bond and stock issuance orgy is also likely to cause a sharp decline in appetite among creditors and shareholders.
Despite falling equity prices, investors continue to show surprising enthusiasm for airlines. If only the passengers felt the same.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
David Fickling is an opinion columnist for Bloomberg who covers commodities as well as consumer and industrial companies. He has been a reporter for Bloomberg News, Dow Jones, Wall Street Journal, Financial Times, and The Guardian.
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