The aviation sector around the world is still feeling the effects of the COVID-19 pandemic and faces the great challenge of getting through this period of time, while many aircraft remain on the ground. Several airlines have stopped flying altogether, while others have reduced their capacity or seen their market decline. For the companies that are still active in the air, the question is always whether the aircrafts are well occupied. As the world is paying full attention to the vaccine race, it is interesting to consider which sectors can experience a boost once an effective vaccine is being released. When the public health finally restores and most people get back up in the skies, airline stocks can become very interesting.

ISHKA and OAG, two recognized airline data analysis companies, recently published a vulnerability matrix that shows the status of the largest airlines in terms of financial risk and the level of support from governments and shareholders. It gives an indication of how well-positioned several airlines are when it comes to surviving COVID-19. The vulnerability matrix can be found here.

Airlines with a low financial risk without the support of interested parties are considered best companies. The matrix shows six airlines that fall under this category: Air Canada, Cebu Pacific, IndiGo, Pegasus, Ryanair and Wizz. There are several reasons why these firms are doing well during this period. The Philippine company Cebu Pacific ($CEBUF) owes its status to a reduction in its capital expenditures and cash flows. As a result, a strong balance sheet was maintained and the ratio between net debt and equity looks sufficient.

Air Canada ($ACDVF) is another remarkable name in the group. The company experienced a deep stock fall in March 2020, after the pandemic took on a global character. Even though the company is known to great losses and experiencing strict laws, the share is increasing at a walking pace. Good news followed earlier this week, as the International Air Transport Association (IATA) has encouraged to ease travel restrictions in, to and from Canada. The international aviation trade organization believes that general testing for the COVID-19 is a good alternative to the current measures. Currently, 14-day-quarantines are required for most incoming passengers, no matter if they are tourists, civilians or permanent residents. It is critical that the government of Canada act on this before the economic and social damage becomes permanent and the public health consequences of mass unemployment becomes an even bigger problem.

Another thing that catches the eye, is that the second-tier American airlines currently score better than their big brothers based on the capacity and market share. This makes clear the size of the airline is not the most important factor. As a result, the shares of smaller players in the market seem to climb out of their shadows. More important is the support of the government or shareholders. The bigger the debt, the more time is required before everything gets back to normal. For the smaller airline companies this may take years. The larger companies will be able to rectify this more rapidly and easily.

The middle of the matrix contains airlines that are considered to have a moderate financial risk. This is the group where we find most of the airlines from the United States. These are companies under financial strain and backed by the multi-billion dollar CARES Act. It’s no sign that these companies are facing bankruptcy, but it is important to know where American aviation stands at the moment. With that, American Airlines ($AAL) appears to be lagging behind when it comes to positioning to survive COVID-19.

The most secure airlines at the moment are the cheaper and smaller airlines that manage to keep both the rates and costs low. For them, fighting for a market share and doing business without outside support is a daily routine. This puts airlines such as Wizz ($WIZZ), Ryanair ($RYAAY) and IndiGo ($INDIGO) in a better market position. It is not surprising that investors in the aviation sector are now looking for stocks outside the United States. Various parts of the world seem to recover faster or have relatively better figures in terms of public health and the number of new cases with COVID-19. China is one of the countries where various airlines see the share price rising again, as they are allowed to enter the airspace more often and service more customers each month.

Shares of several airlines rose yesterday, led by Delta Air Lines ($DAL), after more positive data on travel demand was released, with a rush in the broader stock market also providing support. The Transport Security Administration (TSA) showed that an average of 738,038 people went through TSA travel security checks every day in the second week of this month, including all six components of the airline gaining traction. Last week’s daily average was also its highest since the week ending March 22, well above the post-COVID-19 pandemic low of 97,799 people for the week ending April 19. In addition, August was the fourth month in a row in which the daily average number of travelers improved compared to the previous month.

At the moment the concerns of current investors are not taken away at all. Various (governmental) programs to support airlines are facing the end. Some of the stimulus packages that lawmakers passed at the beginning of this year included billion dollar loans. This money was lent on the condition that airlines would take no further action to reduce their workforce, despite the fact that most airlines have fewer flights and workloads. Next month, those rules may change. Many airlines have similar situations and uncertainties that employees have to face. And the Congress doesn’t seem closer to passing legislation to continue the programs in a different form. Most airline investors believed the COVID-19 would have been cured faster or at least treated more effectively. As a result, we notice an increasing market uncertainty and diverging opinions about the duration of the pandemic and aviation recovery.

For those who do not own shares in aviation already and can invest some money for the long term, possessing shares in an airline company with a relatively healthy status could be lucrative. A world without aviation is simply unthinkable when realizing the impact of the globalization and international markets. It seems many airlines will come out of the pandemic with large losses and debts, while some others quickly resume business in a more healthy situation. If the number of travelers and flights continues to increase and the legislation relaxes, the aviation shares can climb significantly over time.

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By Omar