Investing in ASX airline shares

With domestic and international tourism resuming after the two-year pandemic interruption, many investors might see growth opportunities in the travel sector. In this article, we’ll focus on airline shares to help you work out whether they might be a valuable addition to your portfolio.

Image source: Getty Images

What are ASX airline shares?

Airline shares are a subgroup of travel and tourism shares. They represent companies that operate airlines, such as Qantas Airways and Air New Zealand.

The travel sector is an integral part of a well-functioning economy. Travel companies help people get where they need to go – whether it is for business or pleasure. This is particularly true of airlines, which enable customers to travel incredibly long distances in a single flight, connecting people located at opposite ends of the globe.

However, airlines have historically been hit-and-miss investments. Airlines are heavily dependent on economic cycles. In boom times, people have more money to spend on fancy holidays, and business travel increases as companies can afford to splurge on investor roadshows, corporate functions, and other in-person events.

However, when money is tight, the first thing households tend to cut back on is luxury items like holidays. Companies will also reduce their discretionary spending on corporate travel and entertainment. As economic activity slows, there is less cross-border deal-making going on, also reducing the demand for corporate travel.

This means that airline stocks are only fair-weather friends to investors. They can deliver strong gains when times are good, but may compound your portfolio’s losses when the economy is struggling and share prices are falling. 

Why invest in ASX airline stocks?

As with all companies, investing in airline shares offers a number of advantages and disadvantages.

Because airlines are an important part of the economy, having some exposure to airlines in your portfolio may help unlock additional returns, particularly when the economy is in a healthy growth phase.

For example, in the years prior to the pandemic, Qantas was a great share to own. After its share price bottomed out near $1 in 2014, it went on a tear, shooting up to more than $7 by early 2020.

However, as we all discovered during the COVID-19 pandemic, there are particular risk events that can decimate the travel and tourism sectors. When governments around the world put restrictions on international travel to try and slow the spread of the virus, it sent airline share prices tumbling.

And – even as the world reopens after COVID-19 – other macroeconomic events continue to make investing in airlines risky. Rising interest rates and inflationary pressures are both dampening consumer spending and confidence, while the Russia-Ukraine conflict is wreaking havoc on global oil prices.

Fuel is one of the biggest expenses for airline companies, and higher oil prices are likely to squeeze profit margins just when the industry was hoping to take off (pardon the pun) after COVID-19.

Airlines in a post-pandemic world

The availability of vaccines against COVID-19 has meant governments have been able to relax most of their border restrictions, paving the way for the return of international travel.

However, the continuing emergence of new variants makes the short-term future of the industry uncertain. And some changes in consumer behaviour that emerged during COVID-19 may have a lasting impact on airline travel.

The rapid, forced adoption of remote working may have permanently reduced the demand for corporate travel. During the pandemic, people have become much more accustomed to communicating digitally through platforms like Zoom, cutting the need for in-person meetings and events. With this digital infrastructure now firmly in place, corporate travel may never fully return to the levels seen prior to the pandemic.

On the flip side, the pandemic forced more people to shop online, increasing the demand for freight services. This helped to keep many airlines afloat during the pandemic, as they used their fleet to transport cargo rather than holidaymakers. The shift towards e-commerce may also be a permanent change in consumer behaviour and could continue to sustain airline revenues into the future.

At any rate, the lessening of COVID-19 restrictions hasn’t quite been the boon to the industry that airline companies were originally hoping for. Unfortunately, a full recovery  in domestic and international travel to pre-pandemic levels may not happen for years, if at all.

5 top ASX airline share performers in 2022

(based on market capitalisation from high to low)

Company Market capitalisation Description
Qantas Airways Limited
(
ASX: QAN)
$10.20 billion Australia’s flagship carrier and
largest airline
Auckland International Airport
Limited
(ASX: AIA)
$9.77 billion Largest airport in New Zealand
Air New Zealand Limited
(ASX: AIZ)
$1.98 billion New Zealand’s flagship carrier
Alliance Aviation Services Ltd
(ASX: AQZ)
$638 million Australian fly in, fly out (FIFO)
air charter service
Regional Express Holdings Ltd
(ASX: REX)
$128 million Australian regional and
domestic airline

Empty heading

Qantas

We’ve already mentioned Qantas in this article, and that’s because it is Australia’s largest airline. It also has significant pedigree as one of the oldest airlines still in operation in the world, behind only KLM Royal Dutch Airlines and Colombian airline Avianca.

As with most travel and tourism shares, Qantas was sold off heavily during the pandemic and its share price has yet to fully recover. However, Qantas used the downtime to strengthen its balance sheet, with net debt now below pre-COVID levels.

Although international travel remains subdued, Qantas has stated that domestic travel is returning to pre-COVID levels faster than originally anticipated.

Key metrics:

  • Market cap: $10.20 billion (as of 28 May 2022)
  • Average daily volume: 8.4 million
  • Headquarters: Sydney, New South Wales

Auckland International Airport

While it’s obviously not technically an airline share, Auckland International Airport is still intrinsically linked to the airline industry.

Auckland International Airport is the largest and busiest airport in New Zealand, although its passenger numbers are still substantially lower than pre-COVID levels. A little more than 400,000 passengers passed through Auckland International in March 2022, which is almost 80% below March 2019 numbers.

However, the number of international travellers has been increasing with the relaxation of isolation requirements.

Key metrics:

  • Market cap: $9.77 billion (as of 28 May 2022)
  • Average daily volume: 80,000
  • Headquarters: Auckland, New Zealand

Air New Zealand

New Zealand’s flagship carrier, Air New Zealand is amongst the top airlines in the world in terms of credit rating. Prior to the pandemic, it operated more than 3,400 flights per week, and transported more than 17 million passengers every year.

Its share price plunged at the onset of the COVID-19 pandemic in early 2020, and it hasn’t really increased much since. New Zealand has had some of the strictest border policies in the world throughout the pandemic, so travel shares like Air New Zealand were hit especially hard.

Despite conditions beginning to improve, Air New Zealand still expects to report a loss for FY22 in excess of NZ$800 million, even before accounting for tax and other significant items.

Key metrics:

  • Market cap: $1.98 billion (as of 28 May 2022)
  • Average daily volume: 2.5 million
  • Headquarters: Auckland, New Zealand

Alliance Aviation Services

Alliance is Australia’s leading FIFO charter operator servicing the mining and resources sectors. It also offers domestic charter services and tailored group travel itineraries in both Australia and New Zealand.

In major news, it was announced in early May that Alliance is to be acquired by Qantas in a deal worth well over $600 million, pending shareholder approval. The deal would make Alliance a wholly owned part of Qantas Airways.

Key metrics:

  • Market cap: $638 million (as of 28 May 2022)
  • Average daily volume: 100,000
  • Headquarters: Brisbane, Queensland

Regional Express (Rex)

Rex is the largest regional airline in Australia, and prior to the pandemic it serviced more than 60 destinations across the country. It was formed after the collapse of Ansett Australia in 2002.

Its share price was surprisingly quick to recover from the losses suffered early in the pandemic. Regional Express shares ended 2020 up by more than 60%. Since then, it has again slid lower and is now back below pre-COVID prices.

Key metrics:

  • Market cap: $128 million (as of 28 May 2022)
  • Average daily volume: 40,000
  • Headquarters: Sydney, NSW

Trends in the Australian airline industry

There are a number of trends to watch in the Australian airline industry over the next few years. The trajectory of the industry’s recovery post-COVID will be crucial but isn’t helped by war in Europe and runaway inflation, just as many international borders are reopening.

The federal and state governments are also investing heavily in airport infrastructure. Sydney’s second airport, the Western Sydney Airport, is due to open in 2026, and both Melbourne and Hobart airports are being expanded to handle increased traveller numbers.

Just what domestic and international travel is going to look like post-pandemic is still uncertain. The effect of changes in consumer behaviour prompted by the pandemic – such as telecommuting replacing in-person meetings – is yet to be fully understood. 

Are ASX airline shares right for you?

In this article, we have covered the pros and cons of investing in ASX airline shares. You should use this information to work out whether an investment in airline shares fits with your personal risk appetite and investing goals.

While airlines may be a good pandemic recovery play, there are still many risks and uncertainties affecting the industry. You should take all these factors into account before deciding whether to invest in any of these airline companies.

Last updated June 2022. Motley Fool contributor Rhys Brock has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Alliance Aviation Services Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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