PRIYESH MEHTA

PRIYESH MEHTA

Head Research Analyst at Bovell Global Macro.

Are Airlines Poised to Rally?

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The airlines industry has been one of the hardest hit during the 2020 pandemic amid all of the border and quarantine restrictions around the world. As the coronavirus spread across the world during February and March, many countries decided to completely close their borders in order to try and contain the virus. As a result, aircrafts around the world have been grounded for several months and are now slowly starting to recover. 

 

Over the past six months, we have seen a historic sell-off and recovery in the equities markets. Admittedly, the technology sector has been largely responsible for the sharp rally, but we can now see other sectors making a steady recovery as well. However, airline stocks remain close to their March lows (which can be seen on the JETS ETF chart below), and therefore, we see this as a possible opportunity to scale into a portfolio on airline stocks. 

 

Although several risks to the global economy remain, it looks like the worst may be behind us and we are now on the path of recovery. In recent months, border restrictions have somewhat eased and travel demand has begun to pick up once again. In the short to medium term, we believe short haul airlines will experience a quicker recovery, since the demand for this type of travel tends to be more popular. Short haul airlines will also find it easier to resume a large number of their routes, whereas longer haul airlines will find themselves more restricted due to ongoing border closures and quarantine rules. 

 

However, for both types of airlines, we see opportunities to gradually build an airlines portfolio, which will likely play out over a horizon of 2-3 years. The main risk to such an investment is the threat of a second wave of COVID19. The reintroduction of border restrictions may see airline stocks re-test the lows from earlier this year but the odds of a break below those levels remain low, provided that governments are prepared to continue supporting the airlines industry. In consideration of these risks, we are looking more closely at US and European airlines as the governments here seem more inclined to bailout airlines. 

 

In the coming months, if the economic recovery remains on track and we get a vaccine for the coronavirus, global travel demand and airlines will likely see a return to normality.

 

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