Davy analysts: Smaller airlines will disappear

Airline traffic recovery may not reach last year’s baseline levels for another three years, and many smaller airlines will disappear, Davy Stockbrokers have said.
Davy analysts: Smaller airlines will disappear

EasyJet planes sit on the tarmac at Luton Airport. The company is not in a strong position during the grounding of flights.
EasyJet planes sit on the tarmac at Luton Airport. The company is not in a strong position during the grounding of flights.

Airline traffic recovery may not reach last year’s baseline levels for another three years, and many smaller airlines will disappear, Davy Stockbrokers have said.

In a note, research analysts Stephen Furlong and Ross Harvey said they now expected “a smaller, more concentrated industry post-crisis and certain airlines to have gained market share”.

Those airlines include Ryanair, Aer Lingus and British Airways owner AIG, and Hungarian low-cost airline Wizz Air, Davy said.

“Traffic recovery will be slow, perhaps not reaching baseline 2019 levels until 2023. Discounting,aided by low fuel prices,could accelerate this but only few airlines will survive without long-term equity impairment,” the note said.

Davy said that all airlines have continued to look at every measure to reduce operating expenses.

“Most will need explicit state backing, in Norwegian’s case, a potential debt for equity swap leading to a permanent, or at least semi-permanent, equity impairment. For others, the capital structure may become so indebted that it will take several years of positive free cash flow to return the capital structure to 2019 levels,” the analysts said. Davy reiterated its belief the European market will follow the US model of consolidation.

“Airlines that were strong coming into this crisis should be stronger coming out. Many will disappear. Some will be significantly smaller.”

Aircraft deferrals, lease extensions and aircraft retirements will become the norm, the note said.

In the longer-term, a coordinated global response will be needed as the industry’s 75% break even load factor is some way off, it added.

While the industry is burning through cash, according to the International Air Transport Association (IATA), Mr Furlong and Mr Harvey said Wizz Air was in a good position currently, compared to easyJet.

“We believe Wizz is in a better-than-expected position. Less than half of cancelled bookings require cash refunds and liquidity appears to have held up well so far, but EasyJet is in a slightly worse-than-expected position,” they said.

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