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Introduction to the Global Commercial Airline Industry | History, Pandemic and Recovery

Learn more about our Airline ETF

We explore the underlying theme of our Airline ETF and how the airline industry has been affected by the pandemic and reduced travel. 

 

Introduction

Over the past 100 years, few inventions have changed how people live and experience the world as much as the airplane. Ever since the Wright Brothers made their first flight at Kitty Hawk on a chilly December day in 1903, the plane has captivated passengers, innovators and investors alike.

Today, air travel has become so commonplace that it would be hard to imagine life without it. It has changed the way we live and conduct business by shortening travel time and altering our concept of distance, making it possible for us to visit places once considered remote.

Thanks to an impressive safety record, passenger satisfaction scores were among the highest ever recorded heading into 2020, according to J.D. Power.[1] Indeed, despite two fatal Boeing 737 MAX crashes in 2018 and 2019, commercial air travel has never been safer than it is today.

Investor confidence likewise took off as airlines posted improved quarterly earnings from a decade ago. The industry underwent an historic transformation in the 2000s, a period marked by bankruptcies, consolidation and restructurings, and in the decade that followed, airlines enjoyed strong profitability and free cash flow. Companies became lean and efficient, with management focusing on reducing unprofitable routes, tapping new revenue streams and returning capital to shareholders. In 2019, the global industry collectively recorded net profits of $26.4 billion, the grounding of the 737 MAX notwithstanding. 

 

A Challenge Like No Other

Everything changed, of course, when the COVID-19 pandemic struck, making 2020 the most unprofitable year on record for global airlines. Worldwide tourism dried up. International arrivals plunged an unprecedented 74% compared to the previous year, the equivalent of 1 billion fewer tourists.[2] Business travel similarly disappeared as companies turned to video teleconferencing software such as Zoom and Microsoft Teams. 

In the U.S., commercial air travel demand hit a record low on April 13, 2020, with the number of passengers totaling 87,534, an incredible 96% decline from the same calendar day a year earlier. The impact to European network traffic was just as severe: In the week ended April 19, 2020, there were nearly 90% fewer flights than the same period in 2019, according to Eurocontrol. Global airline stocks tanked 20% in February 2020, a further 40% in March.

During this time, deep-value retail investors and hedge funds began bargain-hunting. Many sought exposure to airlines, an industry that’s universally considered essential in today’s interconnected world. From the end of February to the beginning of June, the number of investors on the popular trading app Robinhood who held the U.S. Global Jets ETF (JETS), the only pure-play global airlines ETF at the time, surged from under 400 to approximately 40,000, an increase of 9,900%.

 

The inflows continued even after it was announced, in early May, that Berkshire Hathaway’s Warren Buffett had sold all of his holdings in the big four airlines: American, Delta, United and Southwest. Within as little as three weeks, the panic sell cost his firm some $2.7 billion.[3] 

After news came out of his airline departure, Buffett was roundly criticized by some prominent market watchers. Bill Miller, the former chief investment officer at Legg Mason, urged investors that if you don’t own airlines, “you’re making a bet against the vaccine.”[4] 

Then, in June, day-trader Dave Portnoy posted a series of videos on Twitter wherein he took jabs at Buffett for missing such a once-in-a-lifetime opportunity. Buffett “misread the market dramatically when he said get out of airlines,” the Barstool Sports founder commented.[5]

Many readers will likely agree that Miller and Portnoy were vindicated when, only six months after Buffett made his exit, Pfizer announced that it had developed a safe, effective vaccine against COVID-19. By mid-December, the vaccine was being administered to frontline medical workers.

Fast forward to April 2021, and the Centers for Disease Control and Prevention (CDC) reported that half of all American adults received at least one vaccine dose. Meanwhile, shares of American, Delta, United and Southwest had all more than doubled since Buffett dumped them.

 

A Break in the Clouds

We believe the commercial aviation industry is an attractive way for investors to play the global vaccine distribution effort and economic reopening. On April 2, the CDC updated its guidance, saying that fully vaccinated people could travel “at low risk to themselves.” What’s more, travelers within the U.S. no longer need to take a COVID-19 test or self-quarantine afterward. The same goes for international travel unless the destination country requires it.[6] 

Leisure travel is well on its way to recovering in the U.S. Analysts at consulting firm Oliver Wyman predict that U.S. domestic air travel will fully recover by early 2022. According to its Airline Economic Analysis 2020-2021, vaccination efforts are moving much more quickly than earlier anticipated, potentially resulting in a nationwide return to pre-COVID conditions by next year. Business and international travel, however, may take another year or two to fully rebound.[7] 

In the first quarter of 2021, the daily number of passengers boarding commercial flights in the U.S. jumped nearly 60%, from around 800,000 at the beginning of the year to as many as 1.3 million. This is still 40% below traffic levels at the same time in 2019, so we see plenty of upside potential.

Consequently, airline stocks soared close to 30% in the three months through March 31, 2021, handily outperforming the S&P 500 Index. Among the best performing carriers were American, up 55.5%; JetBlue, up 46.3%; and Alaska Air, up 42.5%.

 

There are other encouraging signs that demand for air travel is improving. In late March 2021, bookings through aa.com and the American Airlines app were up as much as 400% compared to the same time last year. Google searches for American, Delta, United and Southwest were at or near 12-month highs as of April 2021. 

 

What About European Carriers?

On the other side of the Atlantic, Europe may take some time longer to reach pre-pandemic levels. The International Air Transport Association (IATA) believes the continent to be the worst-hit region in the world in terms of airline losses. However, in late April, Ursula von der Leyen, the head of the European Commission, announced that the European Union (EU) was ready to lift some nonessential travel restrictions and allow fully vaccinated Americans to visit in the summer of 2021. United Airlines executives said there was strong demand for travel to Iceland and Greece after both countries opened their countries to vaccinated travelers.

The good news is that European governments have committed themselves to supporting flag carriers during this time. In May 2020, Lufthansa shareholders agreed to a €9 billion ($10.1 billion) bailout package by the German government, preventing the airline from having to declare bankruptcy. The French government contributed up to €4 billion ($4.8 billion) to bolster Air France-KLM’s balance sheet. And in January 2021, British Airways received a loan from the U.K. government worth £2 billion ($2.8 billion).

 

To learn more about our Airlines ETF, please visit our fund page here.

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