Airlines

Low-cost European airlines one of the best opportunities in fixed income, strategist says

Key Points
  • AXA Investment Managers Senior Portfolio Manager Nicolas Trindade argued that strong balance sheets and low levels of debt mean budget airlines' bonds are trading at levels that do not reflect long-term fundamentals.
  • With the pickup in activity expected as Europe emerges from months of lockdown measures, he suggested that fixed income investors could look to capitalize on these valuations.
A view of northern Italy, near Milan is seen from an airplane window.
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Despite airlines being one of the worst-hit sectors by the coronavirus pandemic, the debt of low-cost European airlines is one of the most attractive opportunities in fixed income at present, according to AXA Investment Managers Senior Portfolio Manager Nicolas Trindade.

Passenger numbers remain well below pre-Covid levels, and airline bond yields remain significantly elevated compared to other areas of the investment-grade corporate debt market. Yields have an inverse relationship to prices.

However, Trindade argued in a note Thursday that their mostly strong balance sheets and low levels of debt mean budget airlines' bonds are trading at levels that do not reflect their strong long-term fundamentals.

With the pickup in activity expected as Europe emerges from months of lockdown measures, he argued that fixed income investors could look to capitalize on these valuations.

"There are still pockets of value out there in the IG (investment grade) credit market, even after all the positive gains in the past few months," Trindade said.

"There are areas in the eye of the storm that have underperformed the market and bonds that haven't recovered their losses despite the wider rally."

He argued that cyclical investment grade companies, particularly in the transport sector, had exhibited robust liquidity and strong balance sheets but had been hampered by the uncertainty surrounding international air travel.

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Just last week, British Airways retired its entire fleet of Boeing 747 aircraft earlier than expected, while the IATA has projected that the airline industry could lose $84 billion in 2020, with many airlines seeking government bailouts to stay afloat due to worldwide travel shutdowns.

Trindade highlighted that some firms' investment grade bonds are still trading as much as 400 basis points wider than pre-crisis levels, even against an improving backdrop as lockdowns ease.

"The strong financial position of these airlines was such that despite the relaxation in travel restrictions, they could quite conceivably go on for quite some time with no revenues at all," he said.

"The airlines also have the benefit of unencumbered assets. They own their fleets rather than lease them, and have low debt levels associated with planes."

However, despite Europe's broad downward trend in Covid-19 cases and gradual return to economic activity, he suggested it is still prudent to be stock specific.

"European-focused airlines, so-called low-cost carriers, tend to have stronger balance sheets than their intercontinental counterparts," Trindade said.

"Some of the former have gone into the crisis with very low levels of debt and a very low-cost base."

A notable exception was British regional airline Flybe, which entered into administration at the beginning of March as the plunge in global travel demand caused by the coronavirus outbreak compounded an existing catalog of financial troubles.