To begin with, a few words on the specificities of the two markets, which are quite marked and not always well known.
On the vast American territory, flying has few alternatives when it comes to connecting two major cities. When the coronavirus began to disrupt economies, American airlines had already made their revolution. Most of them went bankrupt to reorganize themselves after the shock of September 11, 2001. Then began a major consolidation phase that resulted in 75% of the North American market being concentrated in the hands of the "Big Five" (American Airlines, Delta Air Lines,Southwest Airlines, United Airlines, Air Canada). As Masters points out, this consolidation has rebuilt the carriers' grip on prices.
In Europe, the main quintet controls 51% of the market. But it already includes low-cost carrier Ryanair, number one, ahead of Deutsche Lufthansa, Air France-KLM , International Consolidated Airlines (British Airways, Iberia, etc.) and Aeroflot. And the incumbent airlines, which themselves operate low-cost entities, are making their margins on long-haul flights and business travel. Price pressure, rail competition and capitalist nationalism make Europe a complex market.
Much faster recovery in North America
The pandemic has hit carriers on both sides of the Atlantic hard, and all have drawn on government support funds. But the recovery of some has already begun while others continue to languish. And the very structure of their markets makes the weather look much milder in the West. IATA is forecasting -$47.7 billion in net losses for airlines in 2021, after record losses of -$126.4 billion last year. But the international organisation, which updated its forecasts on 21 April, believes that losses in North America will fall from -$35.1 billion in 2020 to -$5 billion in 2021. For Europe, with losses roughly equivalent in 2020 (-$34.5bn), the improvement will be much smaller with -$22.2bn losses in 2021, or 47% of the overall losses expected in the industry this year (-$47.7bn). "Europe's carriers rely heavily on international passenger revenues, with domestic markets accounting for only 11% of RPKs (revenue passenger kilometers, i.e., the number of passengers).IATA explains that the slower pace of vaccination in Europe "will also limit the important intra-European and North Atlantic markets".
On the stock market front, many carriers had a terrible 2020, although airlines have generally rebounded significantly from their March 2020 lows. The performance has ultimately been quite disparate. The JET ETF, which is 80% US airlines, is down -18% from its January 1, 2020 price. At the same time, Deutsche Lufthansa has lost twice as much. But a company like Ryanair, seen as nimble and a potential winner from the demise of the big European airlines, has seen its share price rise by 15% since that time.
The Irish company is an exception in the landscape. Most other carriers are in negative territory. But based on the results expected on December 31, 2022 (or March 31, 2023 for companies with a deferred fiscal year such as Ryanair or Wizz Air), some valuations appear to be very correct. The following table lists the P/Es of the main European and North American airlines in the sector. It shows that the divide is not as east/west as one might have thought. On the other hand, the usual losers still occupy the same seats.
Still, it takes a strong heart to invest in the airline sector based on these ratios alone. Even the great Warren Buffett got it backwards last year, as the Financial Times article points out: he sold his positions in Southwest, United and American Airlines in May 2020, almost at the worst possible time, before most of the stocks had doubled.
The P/E is not the whole story, but it does show that analysts expect many companies to return to normalized or near-normalized earnings starting next year, with the majority of North American groups one step ahead. Investors must favour the most qualitative dossiers in terms of balance sheet, because companies that have lived and still live on a life support system will have to pay for themselves at some point.