MIAMI – Recently, world-renowned investor Warren Buffett sold his stock in Delta Airlines, with the company’s stock price down 58% year to date. As a result, many UK-based investors are now considering whether to sell their shares in UK airlines.
To examine whether selling airline shares may be a smart strategy, let’s first take a look at the market as a whole, before we discuss the market performance of two UK-based airlines.
In the face of the coronavirus crisis, most countries have now banned air travel altogether. A return to international travel does not appear likely anytime soon, so several airlines have taken steps to ground planes, furlough (or fire) staff and suspend board-level pay.
From a trading perspective, this has meant that many traders have been forced to learn how to navigate market volatility; particularly because one set of announcements from a single airline has often caused huge fluctuations in their share price.
Similarly, people who have been forex trading (where one currency is exchanged into another) have seen huge declines in the dollar caused by the Federal Reserve closing the gap in interest rates on the rest of the world.
This has also had a negative impact on the share price of the US airlines, as the dollar is worth far less than it was before; particularly compared to the Japanese yen, which has become a ‘safe-haven asset’.
Overall, the coronavirus pandemic has been disastrous for airlines across the world. The year-on-year revenue for Delta, for example, was down US$2 billion in March.
Similarly, in Australia, the share price of Qantas fell from over AU$6 per share to $2.14. Likewise, in China, the share price of China Southern Airlines fell from over 7CNY in October 2019 to 5.27CNY in March.
British airlines in focus
Although the worldwide sentiment towards airline shares is negative, some analysts in the UK are far more positive, with the share price of some companies rebounding after the government announced loans and a legal case deemed British airlines could delay paying over £1 billion in air traffic control fees.
To assess whether now is the time to get on board with UK airline shares, let’s take a look at two in-depth case studies.
British Airways is owned by International Consolidated Airlines. Since the start of the coronavirus, they’ve been the worst-affected UK airline, and their share price is down 60%. In addition, analysts estimate that up to 40% of their cash flow may be required to stave off the effects of the coronavirus.
However, in spite of all the bad news, now could be a time to buy low and sell high.
After all, analysts believe that International Consolidated Airlines is also well-positioned to cope with the strains caused by the coronavirus, and many expect a rebound as other weaker businesses fail to survive. We’ve also seen some early signs of this, and the firm’s share price has already rebounded by around 10% since the start of April.
Similarly, many forecasters believe that Irish-based Ryanair could be the best-placed airline in the world to deal with problems caused by the coronavirus. This is because the budget airline has large cash reserves and no debt.
In fact, analysts believe that the firm can thrive in a zero revenue environment for up to 24 months. Although there’s still room for Ryanair’s share price to trend down further (it’s down 31% since January 2nd), we could see the ascendency of Ryanair when the travel ban is lifted.
Looking to the future, it appears as though things will get worse for airlines before they get better, and UK airlines are pressing the government to make bailout money readily available.
This is a charge led by Sir Richard Branson, who has personally put another £250 million into his Virgin Group. However, on the other side of the crisis, it seems likely UK airlines are well-positioned to reward investors who stick by them in the bad times.