March 5, 2020 / 10:57 AM / a month ago

Breakingviews - Airlines are pure punt on V-shaped virus recovery

A plane carrying passengers who have been under quarantine on a coronavirus-stricken cruise ship off the coast of Japan, the Diamond Princess, lands at RAF Boscombe Down in Amesbury, Britain, February 22, 2020.

LONDON (Reuters Breakingviews) - If the past is any guide, the stock market’s mauling of airlines due to the coronavirus outbreak is excessive. The global spread of the disease has hammered demand for air travel, knocking share prices and pushing UK budget carrier Flybe into bankruptcy. Yet previous periods of turbulence have not halted the industry’s steady upward trajectory.

The financial fallout from the latest epidemic will be severe. Industry body International Air Transport Association on Thursday said the hit to airline revenue might range from $63 billion – around 10% of global annual sales – to as much as $113 billion if things get worse. Though some airlines have cancelled flights, half-empty planes and hefty overheads will drain cash. The global nature of the outbreak also means bosses cannot reroute planes and crews from stricken areas.

However, a glance at previous jolts is instructive. When Severe Acute Respiratory Syndrome emerged in China in 2003, Cathay Pacific Airways, the Hong Kong-based carrier most exposed to the outbreak, suffered an 80% slump in traffic. Three months later, though, passenger numbers had recovered completely. Earnings the following year were 10% higher than in 2002. If the coronavirus remains a 2020 problem, airlines’ earnings prospects for 2021 and beyond should stay on their pre-virus course.

Investors are currently taking a bleaker view. By Thursday morning British Airways owner International Consolidated Airlines (IAG) had lost 3.4 billion euros of market value since Feb. 21, when the coronavirus reached Italy. That’s equivalent to last year’s operating profit. Yet Bernstein analysts calculate the hit to its bottom line will be just a third of that amount if the crisis lasts until July. A 10% decline in traffic this year would produce the same outcome.

An extended slump could quickly wipe out dividends, and threaten airlines’ existence if they can’t repay debts. With 6.6 billion euros of cash and net debt equivalent to 1.4 times last year’s EBITDA, IAG looks well cushioned. Smaller Norwegian Air Shuttle, with 6 billion euros of net debt, looks shakier. Stronger airlines that can survive the bumps should bounce back. That makes the sector a pure-play punt for believers in a V-shaped virus recovery.

Breakingviews

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