Airline stocks are back to square one; here’s Morningstar’s view on when they will recover
When will airline stocks recover? It’s anyone’s guess but there are lights at the end of the tunnel.
Admittedly more of them came from across the Tasman but ASX-listed Air New Zealand (ASX:AIZ) could well benefit.
Like Australia, New Zealand has strictly limited international arrivals since March 2020. The launch of the Trans-Tasman bubble caused some hope but numbers reached nowhere near COVID-19 highs and the government ended up pausing the bubble in July.
But last week the government outlined plans to re-open its borders as soon as early next year.
This would allow vaccinated travellers from low-risk countries to skip isolation entirely and those from medium-risk countries to undertake a lesser form of isolation than the current “14 days in a hotel” model – potentially quarantining at home or for a shorter period.
Air New Zealand shares saw a slight bump on Thursday but this good news was dampened by the company deferring a planned capital raising until next year.
While the government committed to spearheading the deal it said the environment was too uncertain to give a pre-commitment.
Last week was a good illustration of how volatile the recovery will be for Air New Zealand, as well as Qantas (ASX:QAN).
Morningstar equity analyst Angus Hewitt reiterated this point last week. While he predicted international capacity would not recover to pre-COVID levels until 2024, the current downturn in share prices might not last until then.
“We think much of the downside risk is already priced in,” Hewitt said.
“We expect the duration of the downturn is limited by the vaccine rollout as lockdowns and border restrictions become increasingly unnecessary, and balance sheet strength is sufficient such that Qantas and Air New Zealand can ride out potential lockdown extensions, avoiding material destruction of shareholder value.”
Morningstar thinks Air New Zealand’s fair value is $1.90 – a 33% premium to Friday’s closing price – and Qantas’ fair value is $5.20 which is 15% up.
Nevertheless, there has been one airline stock not leaving shareholders in suspense as to when it will recover – Alliance Aviation (ASX:AZQ).
The company rode out the pandemic by providing charter flights for the resources sector and professional sports teams.
In FY21, it grew its underlying profit before tax by 25% to $51 million even though it forked out $176 million in acquiring new planes to use as part of a wet-lease agreement with Qantas.
The company reiterated that even the current restrictions have left the bulk of its operations unaffected.