Earlier this week, the German government announced that it was going to sell its 5% stake in the airline Lufthansa, with the intention of offloading its other 15% in the company by 2023. According to Deutsche Welle, the news triggered a 4.9% fall in the price of the same—a nice bit of symmetry.
The German government’s original investment in Lufthansa is relatively recent, having been made in June 2020, when Merkel’s administration stepped in and, under the name of the Economic Stabilisation Fund (ESF), bought a fifth of the company for €300m. As Deutsche Welle put it: “The bailout effectively saved the airline from bankruptcy in June 2020.”
As the world shut down last year, Lufthansa was not the only travel-related company to feel the pinch. Others, such as Carnival, were more creative, issuing bonds against the value of their own cruise ships to prevent the company from sinking (pun intended).
The wider industry was also affected. According to the UNWTO, the sector accounted for 7% of global trade in 2019 and looked set last year to see export revenues plummet from $910bn to $1.2bn. The body also said that 100-120 million tourism jobs were at direct risk because of the pandemic. And what was even sadder was the effect on individuals, far from home, when everything shut down.
Airlines took an especially brutal financial hit. In April, McKinsey released a report, Back to the Future? Airline Sector Poised for Change Post-COVID-19. Its authors wrote: “It’s difficult to overstate just how much the covid-19 pandemic has devastated airlines. In 2020, industry revenues totaled $328bn, around 40% of the previous year’s. In nominal terms, that’s the same as in 2000. The sector is expected to be smaller for years to come; we project traffic won’t return to 2019 levels before 2024.”
But if we are moving past the pandemic—and much of that is still up for debate—are we likely to see a recovery for the airlines? According to McKinsey, business travel is likely to be slow to take off (again, pun intended), but we will see a bump in leisure travel as people try to get abroad, often for the first time in over a year.
But it is questionable how quickly travelling for leisure will take off. Firstly, people are rightfully wary as outbreaks of covid-19 and the rise of new variants push countries on and off the lists of places one can fly to, once vaccinated, and be able to come back without a test, quarantine, or both. The complexity of visiting different nations and of their varying levels of acceptance for the various vaccines is also likely to put people off.
And if there is an outbreak of covid-19 and a country, such as New Zealand in recent days, shuts down again, how likely are we to see insurers pay out for cancelled flights and hotels?
There is also the question of how much the airlines will resemble their old selves when they do come back. At the beginning of last year, as the coronavirus pandemic began to gather steam in Asia, I had reporting trips booked for Rome, Riga, Magdeburg, and London. Three of those trips involved flying. Not a single return fare of the three cost over £100. And when those flights were cancelled, I managed to get some of that back.
Pass the hat around
But, post-covid, airlines have a lot of ground to make up. Again, according to McKinsey: “Many airlines have had to borrow huge sums of money to stay afloat and cope with high daily cash burn rates. Tapping into state-provided aid, credit lines, and bond issuances, the industry collectively amassed more than $180bn worth of debt in 2020, a figure equivalent to more than half of total annual revenues that year. And debt levels are still rising. Repaying these loans is made even harder by worsening credit ratings and higher financing costs.”
Much of the cost are this, says McKinsey, will be borne by consumers who are looking at a 3% increase in ticket prices. That, plus the fact that many airlines now seem to be trimming away at things like cabin luggage, forcing people to pay to put something in the hold, is also likely to deter travellers in the long run.
I am not one to give investment advice. Hand me a cow and I would probably exchange it for some magic beans, but I would not be putting any money I had into an airline.
And that is because the one thing people have not spoken about when it comes to the rebirth of flying is climate change. Last week, the Intergovernmental Panel on Climate Change published its sixth assessment report on the state of the planet.
The results were not bad. They were disastrous.
Flying is terrible for the environment. According to the BBC, around 2.4% of global CO2 emissions can be related directly to flying, with the industry responsible for 5% of global warming. “At first glance,” says Auntie, “that might not seem like very big contribution. Except, only a very small percentage of the world flies frequently. Even in richer countries like the UK and the US, around half of people fly in any given year, and just 12-15% are frequent fliers.“
As more and more people move into the middle class, expect the number of fliers to go up. And, with it, the world’s temperature. “A quarter of all emissions,” counsels the David Suzuki Foundation, “could be from flying by 2050.”
If governments are serious about climate change, there is a good chance that they may try to rein in the airlines, imposing larger and larger taxes to fund efforts to reduce the CO2 in our atmosphere. That will push up prices, leading to more and more refusing to step on a place, either for monetary or ethical reasons. Other forms of transport, such as night trains (and here), are increasingly coming back into vogue.
The upshot is that in airlines, we have a sector that is heavily indebted, likely to push up its prices, is often universally hated by its own customers for terrible service, and probably sits in the sights of governments for their terrible effects on an overheating planet.
That does not sound like a good investment to me. Does it sound that way to you?