Whatever the coronavirus has done to the global economy, the effects are likely to be fairly short-term – aside from in aviation.
At the start of 2020 we were convinced it would be a year of financial correction – a realisation of just how inflated financial assets (stocks and shares) had become, with high prices but earning close to zero returns. We expected clients to increase their allocations into alternative funds on the basis that these earn real, tangible returns from real assets, free from the madness of inflated stocks and shares.
Instead, the virus has completely overturned our expectations. Unlimited central bank liquidity, QE Infinity and interest rate repression mean financial assets have become even more inflated, while the value of real-world assets looks to be in serious trouble as recessionary fears threaten to crash whole sectors of the economy.
The market impact is unprecedented – to use a word that sums up this coronavirus age. We’ve never experienced anything like it. And we have few clues as to how it will develop. As we analyse our portfolio of alternative real assets, we are having to make all kinds of assumptions on how different economic sectors are likely to be affected in the long and short term by the virus and its effects on society. Don’t underestimate just how much individual behaviours are changing.
Two sectors of immediate concern are property and transport. Much has been written about the death of the high street and the end of the large office. However, it’s potentially a boom time for logistics and decentralisation in terms of smaller office branches and HQ hubs. There are opportunities, but also traps.
Whatever the coronavirus has done to the
global economy, the effects are likely to be
fairly short-term – aside from in aviation
Aviation is another sector under massive pressure. Boeing delivered a mere 20 aircraft in Q2. Revenues from passenger plane sales tumbled 68%, while income from service and maintenance nosedived. It is cutting production as orders are delayed or cancelled. The company doesn’t expect aviation to return to normal for three years and plans to lay off 19,000 workers. Boeing is a critical cog of the US economy, accounting for 1% of US GDP and with massive multiplier effects across industry and growth. GE meanwhile posted a $2bn loss, mainly on the back of crashing orders for jet engines. Rolls-Royce and a host of other aerospace firms are in serious trouble.
Aviation-backed finance was a core component of many alternative investment strategies. Deals secured on aircraft revenues were illiquid but offered solid returns secured on the assets that were leased to airlines. The maths worked – they were founded on the idea that planes were a relatively scarce resource and had second- and third-hand value – until suddenly covid literally threw all the assumptions in the air.
The overnight collapse of tourism and business travel means aviation has taken the biggest and most obvious pandemic hit – more than 40 airlines around the globe have gone bust or are in some form of bankruptcy protection. The Boeing/Airbus duopoly looks in serious trouble as orders and deliveries plummet. Some 34% of the world’s passenger aircraft, over 7,600 planes, are sitting unused around the globe. The smaller B-737s and A-320/321s are getting back in the skies, but only because they are cheaper to fly half-empty.
Unlike corporate debt, which rapidly recovered on the back of central banks’ QEI (QE Infinity), many private asset-backed issues – like aircraft – remain in limbo on the back of uncertainty for the future of the economy. There has never been a shock like it.
We simply don’t know how quickly aviation will recover. As long as the virus remains a threat, passengers will remain fearful of flying, and governments will continue to overreact in the absence of clear data. Will business travel ever take off again, now that we all know how to Zoom? Probably… but slowly. Business travel is vital for airlines, accounting for 20% of tickets and 80% of profits. Tourism had seemed at first to recover quickly with repressed demand for holidays emerging after lockdown, but that’s been whacked by nations like Spain being put back on the quarantine list.
We could be looking at a worst-case scenario where it takes years for passenger numbers to recover, and airlines and manufacturers remain massively stressed. Even in the best case, assuming an effective vaccine and the end of social distancing, it could be a year before travel returns to anything like ‘normal’. Airlines will still be facing a solvency issue. They are going to struggle to raise the additional debt required to kick-start new routes or re-equip their fleets – which means there could be some value in some of the apron-queens sitting in the aircraft boneyards. It will be a buyer’s market.
The equation is made even more complex by the fact that aviation was already facing major challenges. As millennials became the target market, environmental concerns and the associated flygskam (flight shame) started to be a massive consideration for the airlines as they tried to appeal to new customers.
Airbus and Boeing have been pointing to China as their most promising and exciting market. They had expected thousands of orders from China in coming decades. With an escalating cold war between the US and China, much of that order backlog could be refocused on China’s domestic Comac design (old tech, but cheap… if it works).
Could things change for aviation? Whatever the coronavirus has done to the global economy, the effects are likely to be fairly short-term – aside from in aviation. In a few years we’ll have learned to cope, and growth will be back on some kind of track again. Unfortunately, airports will have become less enticing for business travel, and more depressing experiences because of virus measures, even if we will still want holidays in the sun.
While history tells us pandemics are bad but survivable, it may not be the same story with the climate crisis – it’s a threat of a different order of magnitude. While the environmental campaigners have taken second place to the pandemic, their message hasn’t changed. Many social analysts now expect the pandemic will trigger renewed and reinvigorated demand for environmental change, and that aviation will be a major target. Smart politicians get that and will play to the Millennial and Gen Z vote.
Which is why I’m predicting a renewed demand for environmental improvement to drive a second wave of investment into renewable energy, clean power and new environmentally friendly businesses. Some of these areas show great promise, and the coronavirus may act as a catalyst to accelerate investment into them.
