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Is Commercial Aviation Ready to Make a Landing in Investors’ Portfolios?

Published 07-03-2023, 07:39 am
Updated 09-07-2023, 04:01 pm
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“Lufthansa is back.”

Those are the enthusiastic opening remarks of Carsten Spohr, CEO of Deutsche Lufthansa (OTC:DLAKY) (ETR:LHAG), in the European airline’s earnings report for 2022, released last Friday.

I think it would be just as accurate to say that commercial aviation in general is back, with attractive investment opportunities.

Spohr reported that Lufthansa, Europe’s largest carrier group by revenue, achieved an “unprecedented turnaround” in 2022 on the back of increasing demand for air travel. Revenue of $34.5 billion was almost double what it collected in 2021, while free cash flow came in at $2.6 billion, the highest annual amount in the German company’s history. Shares were up approximately 5.3% in intraday trading on the news.

Lufthansa Free Cash Flow

Lufthansa went on to announce that it ordered 22 new long-haul aircraft from Airbus (OTC:EADSY) and Boeing (NYSE:BA), the company’s largest order since 2013.

As I’ve said before, as an investor, I like to see when a company invests in itself. It tells me that management is optimistic about the future and is positioning the company for growth.

That’s exactly what airlines are doing around the globe right now. According to Airlines for America (A4A), U.S. carriers are investing a record amount in new aircraft, equipment, information technology, and more. Capital expenditures are forecast to hit $27.0 billion this year, which would be significantly higher than the $21.2 billion airlines are estimated to have spent in 2022.

More Bang for the Buck

Lufthansa’s blockbuster report is just the latest signal that commercial aviation, one of the hardest-hit industries during the pandemic, may be ready to make a landing again in investors’ portfolios.

Travel demand is surging as Europe, China, and other key markets have dropped travel restrictions, and in the interim, carriers have adapted by streamlining operations, eliminating unprofitable routes, and more.

The actions appear to be working. Even though total passenger volume hasn’t fully recovered to pre-pandemic levels, operating revenues are soaring to new record highs, according to Bureau of Transportation Statistics (BTS) data.

Arline Revenue Vs. Passenger Volume

Domestic airlines have managed this without having to cut jobs at the same pace as the tech industry. In fact, passenger airlines in the U.S. currently have the largest workforce in 20 years, according to A4A.

Staff members are also producing more bang for their buck. In the chart below, you can see that sales-per-employee for select carriers were higher in the past 12 months than in 2019, before the pandemic. This indicates that the decision not to sacrifice customer service in the name of cost-cutting has been financially rewarding for airlines.

Airline Sales Per Employee

To me, that’s a win-win-win-win: a win for airlines, a win for employees, a win for customers, and a win for investors.

Aviation Is Investible Again”

“Aviation is investible again,” says Jun Bei Liu, a portfolio manager at Sydney, Australia-based advisory firm Tribeca Investment Partners. Speaking to Bloomberg last month, Jun Bei said she believes Asian airlines “are going to go through the roof.”

I’ve highlighted Asian airlines in recent weeks, particularly after the Chinese government announced it was lifting pandemic-era quarantine requirements for travelers entering the country. I still agree with Jun Bei and others in forecasting a dramatic travel rebound in Asia this year, even though Chinese demand so far hasn’t been as strong as unexpected.

Perhaps surprisingly, shares of European carriers are leading those in Asia and the U.S. I say “surprisingly” because there are so many negative headlines about airlines right now, but often these headlines don’t accurately reflect what’s really happening. European airlines rose over 41% in the six months through the end of February, compared to Asian airlines, up 7%, and U.S. airlines, down slightly at negative 1%, over the same period.

Airline Shares in Europe, U.S., APAC

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All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate for every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of (12/30/22): Deutsche Lufthansa AG, Frontier Group Holdings Inc., United Airlines Holdings (NASDAQ:UAL) Inc., Allegiant Travel Co., Alaska Air (NYSE:ALK) Group Inc., American Airlines (NASDAQ:AAL) Group Inc., Southwest Airlines (NYSE:LUV) Co.

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