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It seems like all of the airlines have now recovered from the post-Covid experience. What's going to happen this summer? 

We are back to around 5 per cent below pre-Covid capacity.

Pretty much recovered then?

Not totally. If we allow for the lost growth of those years as well, we’re still quite a long way from where we would have been if the pandemic hadn’t happened. The industry is back on its feet but within that there are some very interesting buckets. Leisure travel has almost fully recovered. But corporate travel is still only around 60-70 per cent of where it was. 

Big corporates see an economic downturn coming?

Yes. But there is also a structural element. Things like work from home and Zoom, as well as ESG concerns, too. Big business is trying where it can to reduce emissions, which is good news for society, obviously, but not good news for airlines.

In other words, business travel has actually fallen off, but the airlines are still doing ok?

Business class has held up well despite corporate travel being substantially down. It’s consumers who have stepped in and filled that gap of business class travel. That’s thanks to a combination of things: largely consumers not having travelled for a while; people were sitting on vouchers, which they viewed as a sunk cost; and then really just the effects of the bull market, the stimulus, and all of these things meant that a lot of middle-class consumers have said, “You know, I'll treat myself to a business class flight,” which they wouldn't otherwise have done in 2019. 

Can it last?

I think it will prove to be more cyclical than the airlines currently think. Vouchers will run out. And of course, we may get a consumer recession or even an economic slowdown.

But Lufthansa and others have said that they see this as a trend that's going to stay. Their argument is that once you've flown business class, you're more likely to keep flying business class, going forward.

I'm a bit more cautious. If we do the maths, for a family of four, spending, say, £3,000 per person more for a business class flight, that's over £10,000 extra. If you had a choice between spending that on a 12-hour flight versus, say, a home improvement that will last for years, personally, I'd tough it out for those 12 hours.

The low-cost carriers have done really well off the back of Covid haven’t they? 

We saw this after 9/11, after the financial crisis, indeed after pretty much every big airline crisis. The same low-cost carrier playbook gets rolled out: while everybody else cuts capacity, they're ramping up, taking massive share and also structurally reducing their costs through the crisis.

So they come out the other side with a lower cost base than before, higher market share than before, and also a much better supply-demand dynamic than existed before. That's what I think is going to happen again this time around, which is part of the reason why I'm much more bullish on the low-cost carriers than on the full-service carriers.

How could recession affect things?

This summer is looking like being the peak and probably demand will weaken through the latter part of this winter into next summer. But, you know, we are talking about 20, 30 per cent higher pricing than pre-Covid - quite a nice step up from the airlines’ point of view. And through the winter you also have the oil price rolling over, offsetting demand weakness next year. You could even still see year-on-year profit growth in a mild consumer recession. 

So I would be cautious to be an outright seller on the full-service carriers because I think this will be a good summer for all. But I think in the low-cost carriers, you have a good summer plus a good 3 to 5-year structural story, which I'm not convinced you have to the same degree with full-service carriers.

Marcel Stötzel

Marcel Stötzel

Analyst and Portfolio Manager

Patrick Graham

Patrick Graham

Senior Investment Writer