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T2RLEngage 2023: Laggards risk being left behind by airlines in economic recovery

A dichotomy is emerging in aviation between airlines that are repairing balance sheets and those still struggling to recover lost revenues and reduce debt, according to a leading industry analyst.

Neil Glynn, managing director of Air Control Tower, told this week’s T2RLEngage conference that the consensus among investors appears to be coalescing around a declining overall picture in 2024.

Inflationary pressures and oil prices rises are contributing to success seen by some carriers in revenue recovery start to “unwind” leading to profit warnings from some carriers in recent weeks.

“Most airlines around the world are clearly very focussed on structurally improving revenues,” Glynn told delegates who gathered in London for T2RLEngage.

“There are different initiatives being taken…and there are some early success and some are taking more time to produce outputs. I would draw a line between those leading the pack and those that are lagging.

“Using that simplistic divergence helps to understand that those who execute strongly will have a lot more strategic flexibility and opportunity to invest which is imperative when talking about technical investment and decarbonising the whole industry.

“With the whole industry having to emerge from such a horrendous period there are early recovery stories which are giving those airlines a lot more firepower to invest and to take more control over their futures.”

Glynn presented data for a range of airlines that showed how each 1% structural revenue improvement can improved profitability (EBITDA) and cash flow.

Carriers like American Airlines, Lufthansa, United Airlines and eastyJet were at the top end with more to gain from revenue improvement while Ryanair, BA parent IAG, Delta and Southwest were at the bottom end.

Glynn warned this can work both ways if there is more intense competitive from airlines that are recovering more quickly meaning each 1% decline in structural revenue will have the opposite impact on cashflow.

“At this point in time clearly there’s been a huge amount of focus on revenue recovery. In the US we have see a 20 percentage points improvement versus 2019. However, we are starting to see that unwind. The consensus for unit revenue expectations for 2024 are for declines.

“The investment community is starting to think about a slippery slope. Look at share prices, particularly in the US, and we have had fuel price related profit warnings from a lot of airlines in the last couple of weeks. Those concerns are very real at a time when inflationary pressure is high.”

Debt to EBITDA (profitability) proportions have come down although some airlines have seen “quite a large uptick in leveraging” added Glynn.

“There is a dichotomy emerging in the global airline industry. Some airlines have repaired balance sheets, however, some are in a very pressurised position. Should the repair in balance sheets continue to kick on that will clearly have ramifications for those that are lagging.”

The economic situation has seen a resurgence in M&A interest with IAG agreeing to buy a stake in Air Europa, TAP expected to be privatised and Lufthansa’s proposed takeover of Italian airline ITA Airways.

But Glynn said regulators globally are raising the bar for such deals which means “things are getting more complicated from an M&A perspective”.

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