Getting around – transport investment in a pandemic

Getting around – transport investment in a pandemic

29 Sep 2020

AIRLINES – INSOLVENCY DENIAL IMPEDES RESTRUCTURING

The airline industry as we know it is finished, according to Hubert Horan, a transport and aviation consultant. 

After the dotcom bubble downturn in 2001 airline revenues fell by 6% and this resulted in much consolidation of the industry with transatlantic services becoming concentrated in the hands of a handful of players. Long haul and business travel has fallen this year by up to 90%. For US airlines, whose domestic business has held up better, this amounts to a 75% fall in volumes and an 85% revenue decline. 

Horan estimates that the airlines might be able to shed up to 40% of their costs over the next two years. Meaning that they will be burning cash as fast as they burn jet fuel.

Back in Europe, IAG (which is the holding company of BA) reported an impressive decline of 96.7% in Q2 passenger revenues. Easyjet, which was effectively grounded by pan European closed borders saw its revenues decline by a scarcely credible 99.6% over the same period.

Things started to look up for the European domestic companies in Q3 but the latest warnings of a second wave of infections have, according to Michael O’Leary of Ryanair, dealt another mortal blow to winter bookings. 

The business models of Easyjet and Ryanair are based on the economics of full planes and they are both in balance sheet survival mode. Easyjet has raised a total of £2.4 billion through a combination of capital increase, aircraft sale and leaseback and government and bank loans. Easyjet burned £774 million cash in calendar Q2 so we can all do our own sums.

Hubert Horan believes that all the major airlines are effectively bust and should rightly file for bankruptcy. Yet the managements, supported by government aid, are trying to preserve the companies’ equity capital (and their own jobs and shareholdings).

I hear a lot about the EU’s aversion to state aid (apparently a sticking point in any Brexit deal) but it hasn’t stopped the German Federal Republic from offering aid of up to €9 billion to keep Lufthansa airbourne. Air France/KLM has done even better with €10.4 billion from the French and Dutch governments.

Across the pond, US Federal aid of $25 billion has been granted and the airlines are asking for the same again. (That’s approximately the sum that the US airlines spent on share buybacks in the last five years).

This is closet nationalisation save for the fact that the managements carry on as before – including their programmes to buy and lease new planes – while the shareholders can cling on, impoverished but dreaming of a distant recovery. 

At present, the forced industry downsizing looks both incomplete and permanent. But the food chain attached to the airline industry is so vast – from aeroplane building to maintenance services to airports with all the related local jobs – that Horan believes that there is a huge element of denial among all parties from governments down.

State aid is ultimately funded by taxpayers. The return we can expect on our investment will probably come in the form of fewer and more expensive flights.

PUBLIC TRANSPORT – LIFE SUPPORT UNLIKELY TO BE SWITCHED OFF

Trains and buses are on the face of it in a better state.      

These are public services in a way that could not be said of airlines. For that reason in the UK the government is paying to keep passenger services moving although at the same time doing much to discourage people from travelling. Go-Ahead reports that while many of its services are only half as full as usual, 90% of its revenues are underpinned by government guarantees. 

It seems that the bus and travel companies are not burning cash. So while sentiment towards their foreseeable future is understandably negative, investors have a reasonable option of sitting it out and even setting their own long term buying prices. 

Bizarrely, it seems, shares in airlines have performed better than those in bus and rail companies this year.

Year-to-date share price change
Bus and rail
Firstgroup -70%
Go-Ahead -74%
National Express -71%
Stagecoach -78%
Airlines
Air France/KLM -71%
American -62%
Delta -50%
Easyjet -66%
IAG -63%
Lufthansa -58%
Ryanair -24%
Southwest -32%
United -62%
Wizz -23%

 

On the face of it, this supports Horam’s assertion that shareholders and stakeholders in airlines are in denial.

But is it time to buy the pubiic transport companies? The short answer is that timing is even more difficult than usual but the value is beginning to look compelling.

GO-AHEAD – SITTING IT OUT

Go-Ahead released its fiscal 2020 results (year end June) on 24 September. This period therefore included the months of maximum lockdown (so far) when people were actively urged to avoid public transport.

At 566p per share Go-Ahead is capitalised at £244 million. Adding net debt of £929 million, most of which (£649 million) represents operating lease liabilities (since the advent of the accounting standard IFRS 16), its enterprise value is £1173 million. In fiscal 2020 free cash flow was £379 million which adds up to an historic free cash flow yield of 32%. The company expects to remain cash flow positive in the future and to resume dividend payments at some point.

The shares dropped after the results, not, I assume, due to the figures themselves, but to the latest government U-turn on whether people should return to offices. Governments will U-turn (though few have executed that manoeuvre with such frequency as this one) but we should remember that the government seems to happy to pay for empty trains and buses to pootle backwards and forwards sine die.

I cannot see any rational reason why Go-Ahead shares need to be cheaper than they are now.

CARS – UNLOVED BUT UNAVOIDABLE

And so to the future of cars

It is probable that if cars were invented now we might all agree to ban them, just as we might ban cigarettes and nuclear bombs if they didn’t already exist. Though it is easier to imagine the world without the latter two than without cars. Canal barges replaced horses, steam trains replaced canal barges and cars mostly replaced trains and at this point we were still in the early twentieth century. 

If there were a vote to decide which single product defined the twentieth century I would choose the car over the telephone, the television, the computer and the atomic bomb. The car was one of those revolutions that everyone could see coming from a long way. Car companies were the internet start-ups of the year 1900. There were reportedly 3,000 makes of car and I have no doubt that many people lost most of their money, just as they did in the tech bubble one hundred years later.

It took until the 1930s for cars to become practical for ordinary people in terms of price and utility. And each nation that embraced them needed to build a highway infrastructure to enable the kind of personal mobility that could truly revolutionise the way that the human race could socialise and work. 

The costs of this revolution could be measured in pollution, injury and death. The benefits were less tangible but huge. I have seen an estimate that the global automotive industry supports 50 million jobs.

STRANGE TIME TO DECLARE WAR ON CARS

We don’t hear much about the benefits these days, partly, no doubt because, in the UK, only around 16% of the people reside in rural areas where the need for cars is more obvious. In London the city seems to be being redesigned for a future in which cycling is the default form of transport. In the borough of Lewisham there is a pretty explicit war on car users with roads being closed to traffic without local consultation under the smokescreen of “social distancing” requirements. Some of these have reopened after public protests and petitions, partly due to the polluting gridlock that has been the result of “kettling” the traffic..

In addition one of the main access roads to the centre of the town has been reduced from two lanes to one in order to offer the cyclists a choice of the existing lane on the pavement and an adjacent lane on the road. 

 

It is a strange time to make war on car drivers. People have been encouraged to go out less often and consequently the average supermarket shopping basket has grown in volume. Who cycles home with a week of supplies for a family? No one. Online food shopping is sharply up. How many grocery deliveries are made on bicycles? None. 

THE PRO-CYCLING MANTRA IS A PRETEXT

Moreover, the proportion of the nation that could possibly switch from car to bicycle is really quite small. Of the 67 million UK residents, 28 million are realistically too young or too old to use bicycles as their primary transport. That leaves 39 million of whom I regret to say 11 million are obese and 14 million are merely overweight. The thought of these lycra clad wobblies giving it a go is doubtless pleasing to some but I suspect that they will be tough to win over.

That leaves 14 million of whom 1.5 million on average are rural dwellers. By these crude assumptions, the maximum target market for discarding cars in favour of bicycles is 12.5 million or 18.6% of the population.

According to cycling UK, 1.7% of all journeys in England are made on bicycles: and I suspect that a startling proportion of those are in London and university towns. The other UK nations are less enthusiastic. Whatever the desirability of encouraging the pedalling lifestyle, it still looks and feels rather niche and fair weather, regardless of what the London mayor says. This is why the pro-cycling policy looks pretty unambiguously like a war on motorists, regarded by some as worthwhile regardless of whether there is a single extra bicycle journey.

EXPECTING GLOBAL CAR OUTPUT TO JUMP AGAIN

Due to weaker economies, especially this year, global car sales, which peaked at 79 million in 2018, are expected to fall to around 60 million in 2020, a 24% decline. Aside from dealerships closed by lockdown, many people in Europe were already hesitating about replacing their cars due to the hostility against diesel emissions. Diesel cars were both encouraged and incentivised until a few years ago. Much as most people approve in principle of electric vehicles, these are not ready for the mass market due to a) their cost b) their range and c) their demands on the grid.

In view of the above, some people expect a sharp recovery in car sales some time next year. Let us not forget that, whatever the cycling fans may wish, demographics favour cars. Populations are ageing and even if we flatten the obesity curve, so to speak, a trend in favour of motorised personal mobility looks hard to argue against. Curbs on freedom and limits on   

Individual choices are more common than is normal in the United Kingdom at present. If the right to drive oneself from A to B becomes an assertion of independence, as it was nearly a hundred years ago, then so be it. 

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