For domestic air travel stocks, return to normal could be a long haul

Share prices for regional airlines Alliance Aviation Services (ASX:AQZ) and Regional Express Holdings (ASX:REX) are showing strength, with both companies trading well off their March market lows.

In fact, Alliance shares were trading at an all-time high of $3.13 Monday, while REX was trading at $1.07; similar to pre-COVID-19 levels in early 2020.

The sheer size of the Australian aviation market means there is good money to be made.

“Australia is the seventh largest market in the world in terms of number of seats,” said Simon Westaway, executive director of the Australian Tourism Industry Council.

“More Australians per capita fly domestically than any other nation.”

This could explain why so many investors are interested in putting funds into a recovering airline sector.

But they could be getting ahead of themselves, as some experts say it will take time for our skies to return to normal.

Soft demand

“Domestic air travel will start to come back, but demand for it is going to be quite soft for some time,” Westaway said.

There were three reasons for this, he said.

Firstly, customers generally are unwilling to take risks with air travel right now.

Secondly, business travel — which underpins a lot of Australian air travel — is still at low levels.

Thirdly, Melbourne’s COVID-related closure as a key transit hub has left a large hole in the Australian domestic aviation market.

Instead of flying, Australians were taking more road trips, especially to places close to capital cities such as Queensland’s Gold Coast, he said.

Far-flung tourism destinations in Australia such as Broome, Cairns and Darwin are trickier for air travellers.

“Broome, Cairns, Darwin and central Australia are in the same boat in they have reduced air travel,” Westaway said.

Trans-Tasman Bubble

Melbourne’s absence from the national aviation scene makes it difficult to open air bridges to Tasmania, and also to New Zealand – the so-called Trans-Tasman Bubble, said Westaway.

“A lot depends on places like greater Melbourne and Sydney. That will determine when Trans-Tasman flights can re-start,” he said.

New Zealand’s borders are currently closed to all air and sea travellers, except for critical travel, according to the New Zealand government’s website.

“The international market is pretty closed off and won’t be open until the second half of 2021,” Westaway said.

Qantas said it was aiming to resume international flights from mid-2021, and it is slowly returning domestic flights to a normal schedule from October.

Raising capital

Virgin Australia (ASX: VAH) went into administration in April, and new owner Bain Capital is working to relaunch the airline.

Qantas (ASX:QAN) completed a large capital raising for $1.36bn in June as shareholders threw their weight behind the company’s post-COVID-19 recovery plan.

Alliance also raised $91.9m from a share placement at $2.95/share in June.

In an investor presentation for its capital raising the company said demand for ad-hoc charter services is expected to continue at heightened levels into 2021.

Alliance has increased services for resources sector clients in response to COVID-19 risk mitigation measures, and it has received requests for services from new customers including domestic tourism operators.

REX intends to restart domestic jet passenger operations from March 1, 2021 if it can raise $30m before the end of July.

One option is to raise the funds through a sale-and-lease-back of 15 aircraft from its 60-strong fleet of SAAB 340 aircraft. Other sources of funding are under consideration.

The east coast Australian domestic market is likely to be the priority focus for REX when it re-starts services, the company said.