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Since March 2020, the coronavirus pandemic has battered US commercial airlines, creating billions in losses, as passengers eschewed air travel. A US airline recovery may take years, says the market consensus, yet four factors suggest a shorter-than-expected return trip – and an investor opportunity, according to Ravi Shanker from Morgan Stanley.

Key quotes

“US revenue-passenger kilometers could return to pre-COVID levels by late 2021 or early 2022 – with a bear case of 2024 that’s in line with the consensus – and a bull case of early 2021. How the US and global nations navigate the pandemic’s trajectory and international border reopenings will no doubt affect these projections. ‘Ultimately, even when we take the second or third wave of the pandemic into account, long term, we see very limited permanent demand substitution for air travel as a result of COVID-19, post-vaccine,’ says Shanker.”

“Management teams will quickly look to restore capacity flights to pre-COVID levels – especially when they no longer need to block middle seats for social distancing. Fewer domestic airlines and less competitive pressure also help. Furthermore, load factor jumped by four to five percentage points coming out of the past five US economic downturns. Load factors could snap back to as high as 70%, and available seat miles could reach 2019 levels by the second half of 2021, but fares/passenger revenue per available seat mile may take several years to bounce back – similar to the 2001 recovery.”

“Thanks to the CARES Act, US airlines have managed to control their cash burn, averting potential near-term liquidity issues. However, with the CARES Act expiring – and CARES 2 likely delayed until after the US election – some airlines have already begun to trim costs with furloughs or layoffs, and may even start to cut passenger routes.”

“Given the strong correlation between jet fuel and oil prices, and the forward strip calling for Brent of $45-$55 a barrel over the next several years, Morgan Stanley estimates that jet fuel prices to be range-bound at $45-$65 a barrel. For investors, near-term volatility and the industry’s uneven history of capacity discipline means quality still wins, says Shanker, who favors low-cost and ultra-low-cost carriers.”