Analyze This: Airlines

Air travel takes flight again thanks to COVID Vaccines

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We asked Tommy Zhang, CFA, Senior Analyst at Pacific Asset Management, sub-advisor to Pacific Funds fixed-income funds, to analyze the airlines sector amid the economic rebound.

Prior to COVID, the airline industry had successfully navigated through SARS, Bird Flu, Ebola and 9/11. While these events were certainly alarming at the time, the industry managed to work through them. As such, when COVID first broke out, alarm bells weren’t exactly ringing, as expectations were for the virus to be largely confined to Asia with the financial impact being relatively muted.

However, this quickly turned out to be wishful thinking. At the height of the pandemic in April 2020, passenger air traffic was down about 95% year-over-year. This decline dwarfed all prior downturns. For example, U.S. air traffic was down just over 30% in the months immediately following 9/11.

Given the unprecedented level of decline, the airlines immediately entered survival mode in order to stem cash outflows (in April, American Airlines’ daily cash burn was nearly $100 million, wiping out the carrier’s 2019 earnings in a matter of weeks). During this time, there was considerable uncertainty as to whether the airlines would be able to avoid bankruptcy, as the loss in revenue coupled with customer refunds placed a great deal of strain on credit metrics. But ultimately, through a combination of government aid and successful debt issuances, the airlines were able to raise billions in additional liquidity, keeping them afloat through the downturn.

As we entered 2021, most of the major U.S. airlines had sufficient liquidity, but were still cash-flow negative, as air traffic remained down about 60-65% year-over-year. But traffic trends began to improve as vaccine distribution took off. This trend accelerated in the last few weeks, with U.S. air traffic returning to 70-80% of 2019 levels (down 20-30%). This recent surge allowed the industry to achieve a meaningful milestone; cash flow finally turned positive.

Looking ahead, there are several reasons to be optimistic about the prospects of the aviation industry. Notably, while the recovery has recently accelerated, most of it continues to remain driven by domestic leisure travel as corporate and international travel remain muted. This is encouraging since cash-flow profiles have returned to a sustainable level on the back of leisure strength alone. With border restrictions being lifted and employees returning to the office, there is hope that profitability can return to even more normalized levels, even if some business travel is permanently impaired. This should allow the airlines to gradually transition away from survival into recovery.

This publication is provided by Pacific Funds. Pacific Funds refers to Pacific Funds Series Trust. Pacific Asset Management LLC is the sub-adviser for the Pacific Funds℠ Fixed Income Funds. The views in this commentary are as of June 4, 2021 and are presented for informational purposes only. These views should not be construed as investment advice, an endorsement of any security, mutual fund, sector or index, or to predict performance of any investment. The opinions expressed herein are subject to change without notice as market and other conditions warrant. Any performance data quoted represents past performance which does not guarantee future results. Any forward-looking statements are not guaranteed. All material is compiled from sources believed to be reliable, but accuracy cannot be guaranteed. Sector names in this commentary are provided by the Funds’ portfolio managers and could be different if provided by a third party.

Fund holdings and sector allocations are subject to change at any time and should not be considered a recommendation to buy or sell any security. To obtain top ten holdings for the Pacific Funds, please visit the resource page to view the funds’ fact sheets.

Pacific Life Insurance Company is the administrator for Pacific Funds. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.

Investors should consider a fund’s investment goal, risks, charges, and expenses carefully before investing. The prospectus and/or the applicable summary prospectus contain this and other information about the Fund and are available from The prospectus and/or summary prospectus should be read carefully before investing.

Pacific Funds and Pacific Asset Management are registered service marks of Pacific Life Insurance Company.

Pacific Funds are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA), and are available through licensed third parties. Pacific Funds refers to Pacific Funds Series Trust.

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