Bonds To Equity: Airlines Are Making Money Selling Everything But Tickets

With hopes that their season in hell could be approaching an end, airline stocks are on a tear.

Shares in Singapore Airlines Ltd. jumped the most in 21 years Tuesday while those in Cathay Pacific Airways Ltd. were up the most since 2008 after Singapore and Hong Kong announced the opening of a travel bubble starting Nov. 22. News of successful trials of a Pfizer Inc. and BioNTech SE coronavirus vaccine pushed the Bloomberg World Airlines Index up 9.7% Monday in anticipation of an ebbing tide of pandemic.

The cavalry better come quickly. Right now, much of the industry is running short of rations.

With traffic down 73% from a year earlier in September — and international flights running at just 12% of their levels a year ago — the usual path for companies to bring in cash by eking out a margin on their revenue is still blocked. That could remain the case well into next year, given the likely bottlenecks to producing and distributing vaccines in quantities sufficient to reopen international travel.

Still, there’s more than one way to provision your army. If you can’t sell plane tickets, you can still try everything else that’s not nailed down.

The first thing companies try to sell in a crisis are bits of paper. Airlines have issued $88 billion in bonds so far in 2020, more than half of the $153 billion that the industry sold over the previous four decades put together, according to data compiled by Bloomberg. Throw in the value of loans taken out and airlines’ total debt is up by $124 billion since the end of February, the data show.

It’s a similar picture on the equity side.

Japan Airlines Co. last week announced plans to raise as much as $1.6 billion by issuing shares equivalent to about a third of the existing register. Singapore Airlines' $6.5 billion rights issue in June represents the biggest raising of additional equity by any airline in history. The $27 billion in new shares issued by the industry as a whole this year is equivalent to all the cash raised through that route over the previous six years put together.

In aggregate, all the new debt and equity sold by the world’s carriers this year amounts to nearly two-thirds of the $241 billion that the International Air Transport Association expects the industry to collect in passenger revenue through the whole year.

Companies that own fleets of high-value transport equipment have other ways to get cash, too. EasyJet Plc raised $170 million this month from the sale and leaseback of 11 of its planes to aircraft leasing companies. Air Canada last month took in $365 million from a similar move and Wizz Air Holdings Plc and United Airlines Holding Inc. have done the same.

The fundraising effort has been titanic. Compare the revenue of some of the world’s largest airlines in the most recent quarter with their cashflows from finance and investing, minus the capital expenditure that airlines usually have to commit well in advance, and you can see the picture clearly:

Typically airlines should see cash outflows from finance and investing offset with an inflow from operating activities. That’s what you have with Chinese carriers, which have returned to some semblance of normality in recent months with the suppression of Covid-19. Elsewhere in the world, however, working the balance sheet has often been bringing in more money than selling transport services.

You might regard that flexibility as a hopeful sign — but as we’ve argued, a miserable third quarter is likely to lead to a grim winter for airlines. Chances are there’s far more to come in terms of bankruptcies and restructuring. Getting the industry out from under its Covid-induced debt load could take the best part of a decade.

Furthermore, while demand for tickets from air passengers is more or less an inexhaustible resource, there are only so many assets that a carrier can sell and lease back before it runs out. The orgy of bond and stock issuance this year is also likely to be leading to sharply diminishing appetites among creditors and shareholders.

In spite of the slump in share prices, investors still show a surprising amount of enthusiasm for airlines. If only passengers felt the same way.

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