Airlines Sectoral Indices Poised to Underperform Broad Market’ Ones

Airlines, passengers and businesses have been struggling to respond to the new tide of global travel restrictions announced over the weekend to slow the spread of the omicron variant of the coronavirus. Although the risk may have been exaggerated, our recent history suggests these measures can stay with us for some time. The risk of a second lost winter holiday season has already pushed airline stocks down, with the Bloomberg EMEA Airline Index falling almost 20% this month. This will make it difficult to raise new capital to improve balance sheets – British Airways parent IAG SA, for example, has a net debt of €12.4 billion (around $14 billion). This is at a time of year when airlines strive to improve liquidity and pay back some debt, and this comes after an already tough 18 months of revenue drawdown.

The initial wave of bans on flights from southern Africa, where the omicron was first detected, has given way to broader measures that will make travel more expensive and less convenient - if at all possible - reminiscent of earlier days of the pandemic.

The UK has reintroduced mandatory PCR tests for all arriving passengers and said they must self-isolate until negative. Israel is closed to all arriving foreign nationals for 14 days, while the Philippines said travelers from European countries, including Switzerland and the Netherlands, would not be welcomed for several weeks.

Spain and Switzerland have tightened access for arrivals from the UK, whose return to travel has quickly been reversed. British low-cost carrier EasyJet Plc (ESJ.L) said recently that its flight schedule was unchanged, but they “continue to monitor the situation closely”. Singapore and Japan are also among the countries that are reportedly considering tightening border restrictions.

Since Airlines are now facing a return to uncertainty over a change in public health regulations that have wreaked havoc on customer plans and eroded demand in the early stages of the pandemic, we expect such travel-related indices and other broad sectoral benchmarks to keep losing ground, even though general market trend may be less straightforward. British Airways, for example, stopped flights to Hong Kong until at least November 30 after one employee tested positive for Covid-19 and the employees were quarantined. The airline said it is constantly monitoring its activities as the situation evolves.

The organizers of the World Aviation Festival in London told attendees that the event will continue on schedule starting Tuesday, the day the new UK regulations take effect. The group set up testing at two nearby hotels where delegates who are guests can self-isolate while awaiting results.