In today’s Exponential Investor…
- It’s a BA-d time to be an airline
- The one overlooked metric investors should watch
- Cutting costs
Fancy a holiday?
You’re not alone. Since the start of the pandemic, jetting off to somewhere sunny for a few weeks has been at best difficult, and at worst, illegal.
Even now, anyone hoping to hop on a plane must face web of ever-changing travel requirements and testing regimes.
That’s why just 5% of Britons booked a holiday abroad last summer.
All of this is bad for airlines, and particularly bad for their stock prices.
That’s the reason why last week British Airways (BA) CEO Sean Doyle announced plans to turn the ailing airline around.
Restoring BA’s reputation as a “premium” service and ramping up the airline’s capacity is the way forward, Doyle argued.
But with travel (supposedly) returning to some kind of normality this year, is now the time to snap up airline stocks? And what key metrics should investors look out for when deciding whether to invest in the sector?
Struggling to take off
Let’s use BA as a starting point to understand just how hard the pandemic has hit airlines.
BA is the largest subsidiary of the Spanish company International Airline Group (LSE: IAG) and makes up the largest portion of its revenue.
And in the first nine months of last year, the company lost around €2.6 billion. That’s a much smaller loss (around 50%) than the same period in 2020, but it’s not exactly something to shout about.
And international travel is still well below 2019 levels. Passenger numbers in Q3 2021 were just 43% of what they were two years prior. And this year demand is still expected to fairly low, at 61% of 2019 levels.
Still, the company has plenty of money in the bank, with over €10 billion of cash on its balance sheet – €2 billion more than a year ago.
BA isn’t alone in its troubles, either.
The industry as a whole is set to make a loss of $12 billion this year. Again, that’s a significant improvement on its $52 billion loss in 2020, but nothing to shout about.
But many airlines may look healthier than they appear at first glance.
BA – along with most airlines – aggressively cut costs at the start of the pandemic. Staff were laid off and planes grounded. That helped its bottom line, and keep a lid on its expenditure. But if airlines hope to ramp up the number of flights once again, then their cost base will have to rise too. And inflation is not going make this process any easier.
Hiring (or, more likely, rehiring) staff and refurbishing planes isn’t cheap. The cost of refuelling planes is only getting more expensive – jet fuel prices are up 77% from this time last year – and airports are charging airlines more money to use their runways.
So keeping costs low may be an uphill struggle. And that means that airlines are more likely to pass rising costs on to passengers.
If rising costs is the problem, then what is the solution?
There’s one technology that can help airlines cut costs: blockchain.
In short, a blockchain is a decentralised network that stores information across a number of computers (or “nodes”). Transactions are saved in files (called “blocks”), which are only validated once they are approved by all nodes. The block is placed in a timestamped “chain” which cannot be altered afterwards. It is decentralised (meaning no single computer or “node” controls the network), immutable (as saved data cannot be altered), and it is secure (as all nodes must hold the same version of the blockchain).
So, how could airlines use blockchain to cut costs?
At the moment, when you or I buy a plane ticket, there’s a good chance we don’t buy it from the airline itself. We buy it through an intermediary such as a flight comparison website or a travel agent. Each one of these intermediaries takes their slice of the revenue pie, which means that airlines lose out on income and/or pass costs on to us.
In fact, just three intermediaries process 99% of tickets sold indirectly. Air France-KLM, Air Canada, Lufthansa, and Air New Zealand are already developing a blockchain app that allows them to side-step the middle-man and to sell tickets directly to customers.
Blockchain can also help to address every traveller’s worst nightmare: missing luggage.
Adding a unique marker to every suitcase, which is then uploaded to a blockchain shared between airlines and airports worldwide, will ensure that no one reaches their destination with just the clothes on their back to wear. And, again, this could save airlines money by limiting the number of pay-outs to (understandably) angry passengers.
None of these solutions are a quick fix.
In fact, the future of many airlines will depend on the return of one type of passenger in particular…
Not all passengers are equal
There are plenty of ways for an investor to look at an airline’s stock. How much cash has it got in the bank? How does their cost base look? Do they fly on popular routes, and to popular airports?
But one of the most important – and overlooked – measures of an airline’s success is the number of business passengers it caters for.
Why do they matter so much? Because, although they only make up around 25% of the total number of passengers, they account for around 75% of airlines’ profits. It’s business travellers that are the real money-spinner for the likes of BA.
And that’s why Doyle’s plan to restore BA’s reputation as a “premium” service may be a step in the right direction.
After all, not many people buying business class tickets are actually booking the flight themselves. Most of the time their company (or another, with which they’re doing business) is paying the fare. That’s why business class tickets can be so eye-wateringly expensive – buying business class tickets is a formality many companies feel is obligatory.
And at the end of last year, the number of business travellers was 50% lower than in 2019. So, it’s reasonable to assume that many airlines won’t turn a substantial profit again until these passengers return.
Only when the pandemic is far behind us are airlines – and their share prices – likely to truly recover.
Until next time,
Contributing Editor, Exponential Investor
PS You might be more familiar with blockchain’s most common application: as the technology underpinning cryptocurrencies. At a time when pundits are obsessing over the latest move in bitcoin’s price, our resident crypto expert Sam Volkering has identified two lesser-known crypto plays that he believes are primed to bounce as the market recovers.