Air transport has almost resumed. Airlines companies ? Not really

It’s hard to remember what a normal aviation market looks like. Yet we are getting closer to it week by week.

Passenger traffic in North and Latin America in July was just 10% and 11.5% lower than levels in the same month of 2019, the International Air Transport Association said last week. In some places, the numbers are even healthier. In Brazil, the world’s fourth-largest domestic aviation market has been hit hard by 685,000 Covid deaths, sending its biggest carrier LATAM Airlines Group SA into bankruptcy. That’s reversed, with domestic traffic in July ahead of 2019 levels. Cancun and Las Vegas airports recently saw record passenger numbers.

Things look a little worse as you head east. Around the world, traffic is still down by a quarter, and in Asia-Pacific the numbers are down by almost half. And for air freight, which has exploded in 2021 thanks to land and sea freight congestion and the rush to consume post-Covid goods, the return to more normal pre-pandemic transport patterns is rather a bad news.

Yet Ryanair Holdings Plc’s passenger numbers in the peak month of August were 22% higher than the same level in 2019, and Qantas Airways Ltd. was confident enough in the future to spend A$400 million of its cash on share buybacks. The industry as a whole could return to profitability as early as next year, according to IATA.

While air travel puts Covid behind it, airline actions don’t seem to make the headlines. Last week, the Bloomberg World Airlines Index fell near its lowest point since November 2020 – a month when international traffic was operating at less than 12% of year-ago levels.

One thing is clear from these strong records for summer vacation, Cancun and Las Vegas: leisure passengers have been driving the recovery. Pre-Covid business spending was around 30% of revenue and a higher proportion of profits, but its path to better health has been longer. The Global Business Travel Association had predicted a return to normal in 2024, but last month pushed that forecast back 18 months to 2026.

There are short-term factors that explain this. In Asia, border lockdowns and restrictions persist months after they began to be lifted in the rest of the world. Hong Kong, the premier business-class destination, has seen just 124,100 visitor arrivals so far this year, less than a day’s worth of border crossings at its peak. In Europe, the war in Ukraine has meant that Russia – one of the world’s biggest spenders on foreign travel, spending $37 billion in 2018 ahead of spending by Japan, Italy or Australia – has been largely cut off from international travel.

However, underlying these issues is long-term change. By right, business travel should be doing well right now. Inflation, fuel, and ticket prices are generally not the drivers of demand for a cabin portion whose costs are paid from company accounts. Instead, it’s economic activity that opens the spending accounts – and corporate profits in the United States topped $3 trillion in the June quarter, up 27% from their highest level before the pandemic.

The fact that business travel is not picking up right now is a sign of how much the shift to video conferencing and moving away from burning fossil fuels in favor of in-person meetings has changed the nature of business. This is a potentially permanent development that will force airlines to rethink business models based on the resilience of premium class demand.

Seen in this light, the question we should be asking about the state of airline stock prices is not why they are so weak, but why they are so strong. The best-performing carriers so far this year are mostly those with the least to brag about – Asian airlines that still face largely closed airspace. The top five stocks are all based in developed Asia – Cathay Pacific Airways Ltd., Eva Airways Corp., Japan Airlines Co., ANA Holdings Inc. and Singapore Airlines Ltd.

It’s a sign that investors value the potential of a reviving aviation sector far more than they do the grim reality of airport queues, grumpy passengers, pressure from costs due to rising fuel prices and lingering pandemic-era hangovers.

The enterprise value of the Bloomberg World Airlines Index is approximately 6.6 times its expected earnings before interest, taxes, depreciation and amortization. That’s well below its anomalous levels during Covid, when there were no expected profits to speak of – but it’s comfortably above where things were in almost any other month of the story.

The dismal performance of airline stocks lately is not the result of carriers posting disappointing results. Instead, it’s a sign that investors are slowly coming to terms with just how bad things really are.

More from Bloomberg Opinion:

• Airlines continue to abuse passengers. Regulate Them: Adam Minter

• Embattled US Airline Passengers Deserve a Bill of Rights: Brooke Sutherland

• Stuck in air transport hell? Blame the Long Shadow of Covid: David Fickling

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering energy and commodities. Previously, he worked for Bloomberg News, the Wall Street Journal and the Financial Times.

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