Airline investors see a post-pandemic rebound in low-cost travel
Gulf Times
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New money is flowing to low-cost airlines in the US as they take on giant carriers racing to recover from the unprecedented collapse in travel during the pandemic. Two established carriers that had already been flying sold shares in the past month, while two new airlines managed to raise more than $100mn each in a little over one year to cover startup costs. All four share a common trait: Low operating costs and a customer base seeking affordable flights after more than a year of hunkering down close to home.They’re striking as the domestic leisure business is rapidly returning, even though industry revenue from corporate and international travellers — the domain of bigger carriers — remains depressed.“Low-cost, leisure-focused, domestic-oriented air travel has been in vogue like it’s never been in vogue before,” said Barry Biffle, chief executive officer of Frontier Group Holdings, which held an IPO in March after withdrawing a previous effort to sell stock seven months earlier.The airline industry has never been particularly kind financially, with more than 200 failures or bankruptcies since 1978. But consolidation among the largest players since the 2008 recession set the stage for a comeback. US carriers had $103bn in net profits from 2010 through 2019, before the pandemic drove $46bn in losses.The environment now appears ripe for new entrants led by entrepreneurs focused on keeping costs far lower than the entrenched incumbents and stimulating traffic on mostly uncontested nonstop routes. It’s the same playbook that worked for the previous era of low-cost startups like Allegiant Travel Co and Spirit Airlines Inc.Shares of Sun Country Airlines Holdings Inc, a Minnesota-based carrier that specializes in Sun Belt destinations, have surged 69% since their March 17 debut, while investors have been cooler on Frontier, which has gained only 3.6% since trading started. Avelo Airlines raised $125mn from family offices, private equity firms and individuals, and plans to begin flights from the Los Angeles area on April 28. David Neeleman’s Breeze Aviation Group Inc raised more than $100mn, most of it last year.“Low-cost carriers are proven across the world to be better businesses,” said Avelo CEO Andrew Levy, who was also a co-founder of Allegiant Travel Co. Las Vegas-based Allegiant touted 17 years of profitability before the pandemic ended that streak.Lucrative corporate passengers are likely to avoid air travel for some time as the US economic rebound from the pandemic damage remains a work in progress. Leisure travelers, however, are returning to the skies, with more than a million travellers passing through US security checkpoints each day since March 11. Still, the 1.4mn people screened April 12 remained well below the 2.4mn at the same time in 2019.Airline shares have mounted a major comeback in the past year. After a Standards & Poor’s index of the five largest US carriers tumbled by two-thirds from a January 2020 peak to a trough in May, the gauge has since surged some 160%, though it remains below its pre-pandemic level.That positive sentiment extends to low-cost players that don’t bank on corporate or international travel and whose balance sheets aren’t weighed down by debt. According to the lobbying group Airlines for America, US carriers collectively added $58 billion in debt last year. New entrants can take advantage of hundreds of aircraft that were pulled from fleets and employees who left during a rush to slash spending after travel demand collapsed. More than 150,000 workers voluntarily left the four largest US carriers or took temporary leave.“It’s a time of opportunity,” said Peter Morris, chief economist at Ascend, the consultancy arm of Cirium. “You can get a deal like you never would have in 2019. The window of opportunity is probably not open more than a couple of years.”Morris pointed to JetBlue Airways Corp, co-founded by Neeleman, which went public less than a year after the September 11, 2001, attacks.More Related News