The Indian stock market received a setback last week due to a sharp correction. This week has seen a recovery.
The sudden decline in the market was due to the return of covid fears. The outbreak in China rattled financial markets around the world.
Last Friday’s fall was so sharp that as per a report in the Mint, about Rs 8 trillion (tn) in wealth was wiped out.
Such a decline raises the question of which stocks could be worst hit. And one sector comes to mind at once: Airlines.
The entire airline sector took a beating when the first covid wave hit in 2020. Due to lock downs the industry was largely shut down.
After all, why would anyone travel by air when there was a fast spreading virus.
Thus, the revenues of these companies crashed. They did earn some revenue from cargo transport of essential items. But that could hardly compensate for the massive decline in their core business.
Thus, these stocks crashed.
And for a time it seemed the entire industry was on its death bed.
No one knew how long the lockdowns would last at that time. So everyone assumed the worst.
For a time it seemed the worst case scenario would play out. Large airlines like Boeing were indeed on the brink of bankruptcy. Many airlines needed some kind of direct or indirect assistance.
No one wanted to touch these stocks. Warren Buffett’s dislike for airline stocks was now shared by the whole world.
But then things began to improve. The industry picked itself up and started to recover. People started to fly again even before covid cases peaked.
Investors were sceptical. It seemed like the best days of the airline industry was behind it.
How things have changed.
Once the world started to get back to normal, it was natural for people to want to go back to the lifestyles they had before covid.
And they did just that.
The term ‘revenge travel’ didn’t exist in 2020. It was one of the trends that would come to define 2021 and 2022. The death of travel was one of the pandemic ideas that proved to be wrong.
Once people stated to enjoy the things they missed in 2020, the airline industry was one of the biggest beneficiaries. Business boomed and flights filled up fast. Soon airlines were reporting fulling booked flights for busy routes and ticket prices went up.
This trend has continued throughout 2022 and will probably last well into 2023.
But what about the return of covid? Can the recent jump in cases around the world derail the recovery of the airline industry? And if so, then what should you do with your airline stocks?
Let’s examine all these questions in this article.
The return of covid
First, we must acknowledge that it’s indeed a very serious outbreak in China. And it does have the potential to spread throughout the world. After all, it’s the world’s largest outbreak covid with millions of cases being reported daily.
And this has come at a time when the world was ready to put covid behind it. But the new, devastating outbreak in China, has raised serious concerns around the world.
At this point, no can estimate how long this surge in Chinese covid cases will last, how many will be infected, how many will lose their lives, and as far as financial markets are concerned, if it will spread around the world.
On that last point, the experts seem to agree that the new covid variant causing chaos in China will, most likely, not be as dangerous in other countries due to high levels of immunity and high vaccination coverage.
Even if this new variant were to spread around the world, we’re unlikely to see a wave as deadly as the previous ones.
But as far as financial markets are concerned, there will be disruptions caused by this covid wave in China. It is the second biggest economy in the world. So many companies, including the biggest ones, will be impacted one way or another.
There may even be lockdowns in some parts of the world if the situation turns out to be more dangerous than anticipated.
Thus Indian investors should not ignore the potential impact of this covid wave on airline stocks.
The good news is that governments around the world are preparing for the worst, and we could see a better response to a spread out of China than we saw in 2020.
The Indian government too has been proactive in its response. Various states are conducting audits of their covid infrastructure and are conducting drills to be prepared for an outbreak.
Revenge travel: Will it last?
This is a very important point investors should consider before investing in airline stocks.
You see, most of the recovery in the fundamentals of the industry was driven by revenge travel. This was a desire for people to get back to the life they were living before covid disrupted it. Travel was a part of it and people all over the world rushed to popular destinations.
This gave a massive boost to a struggling industry. In fact, it wouldn’t be too much of a stretch to say that without revenge travel, the airline industry would not be in a good shape today.
So what happens when this trend dies down, as it certainly will one day?
Well, for the airlines that have strengthened their balance sheets and have diversified their routes to lower the dependency on popular travel destinations…there won’t be much of an impact.
But for the weaker players in the sector, this could put a damper on their revenue growth.
Investors should carefully track the business plans of various airlines and how they are being executed. If there is a slowdown in 2023 due to a return of covid, not all airlines will be equally affected.
It won’t be a repeat of 2020. Some airlines will fly through 2023 without too many worries. On the other hand, the airlines with weak balance sheets will struggle once again.
If you’re considering investing in airline stocks, make sure you do your due diligence. It’s a risky sector. If you get either the stock or your timing wrong, you could face serious losses. But if you buy the right stock at the right time, you could find yourself with a multibagger stock.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
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