Air Travel Has Almost Recovered. Airlines? Not So Much

Things look a bit worse as you head east. Across the world, traffic is still down by a quarter, and in Asia-Pacific numbers are off by nearly half. And for air cargo, which boomed in 2021 thanks to congestion in land- and sea-based freight and the post-Covid rush of goods consumption, the return to more normal pre-pandemic transport patterns is mildly bad news.

Still, Ryanair Holdings Plc’s passenger numbers in the peak month of August were a full 22% above the same level in 2019, and Qantas Airways Ltd. was confident enough in the future to spend A$400 million of its cash on a share buyback. The industry as a whole may become profitable again as soon as next year, according to IATA.

If air transport is putting Covid behind it, airline stocks don’t seem to be getting the news. The Bloomberg World Airlines Index last week fell close to its lowest point since November 2020 — a month when international traffic was running at less than 12% of the previous year’s levels.

One thing is clear from those strong records for summer holidays, Cancun and Las Vegas: it’s leisure passengers who’ve been driving the recovery. Corporate spending before Covid accounted for about 30% of revenues and a higher proportion of profits, but its road to better health has been longer. The Global Business Travel Association had predicted a return to normalcy in 2024, but last month pushed that forecast back 18 months to 2026.

There are short-term factors driving that. In Asia, lockdowns and border restrictions are persisting months after they started to be lifted in the rest of the world. Hong Kong, the archetypal business-class destination, has recorded just 124,100 visitor arrivals so far this year — less than a day’s worth of border crossings during its heyday. In Europe, the war in Ukraine has meant that Russia — one of the world’s biggest spenders on outbound travel, with $37 billion of expenditures in 2018 running ahead of outlays by Japan, Italy or Australia — has been mostly cut off from international travel.

Underlying those issues, however, is a long-term shift. By rights, business travel should be doing well at the moment. Inflation, fuel and ticket prices tend not to be the drivers of demand for a section of the cabin whose costs are paid out of corporate accounts. Instead, it’s economic activity that opens up expense accounts — and corporate profits in the US passed $3 trillion in the June quarter, up 27% from their highest level pre-pandemic.

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

Looked at that way, the question we should be asking about the state of airline share prices is not why they’re so weak, but why they’re so strong. The best performing carriers so far this year are mostly those with the least to boast about — Asian airlines that are still facing largely shutdown airspace. The five top stocks are all based in developed Asia — Cathay Pacific Airways Ltd., Eva Airways Corp., Japan Airlines Co., ANA Holdings Inc., and Singapore Airlines Ltd.

That’s a sign that investors are valuing the potential of an aviation sector roaring back to life far more than they are the grim reality of airport queues, grumpy passengers, cost pressure from rising fuel prices and persistent debt hangovers from the pandemic era.

The enterprise value of the Bloomberg World Airlines Index is running at about 6.6 times its forecast earnings before interest, tax, depreciation and amortization. That’s well down on its abnormal levels during Covid, when there were no expected earnings to speak of — but it’s comfortably above where things were at almost any other month in history.

The dismal performance of airline stocks of late isn’t a 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 Keep Gouging Passengers. Regulate Them: Adam Minter

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

• Stuck In Air Travel Hell? Blame the Long Shadow of Covid: David Fickling

This column does not necessarily reflect the opinion of the editorial board or 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.

More stories like this are available on bloomberg.com/opinion