The recovery of the tourism sector, on the wave of revenge spending after years of restrictions and lockdowns, has continued its positive curve and the airline sector has not been outdone. The Bloomberg World Airline Indexan index of 29 airlines based around the world, is up more than 20% from its lows in October last year.
Traffic in the skies returns close to pre-covid levels
Encouraging signs also from passenger traffic which recorded a growth of 64.5% year over year compared to 2021. These are the data reported by the International Air Transport Association (Iata), according to which the trend in the first months of 2023 is still growing sharply.
The first quarter of the calendar year ended on a positive note for air travel demand. Domestic markets have been close to pre-pandemic levels for months. And for international travel demand increased by 3.5 percentage points compared to the previous month’s growth, reaching 81.6% of pre-Covid levels. This was driven by nearly tripling demand from Asia-Pacific carriers, thanks to China’s reopening.
The Return of the Chinese Travelers
The reopening of the Chinese borders in mid-March should favor one further recovery of incoming and outgoing traffic from favorite destinations such as the United States, Japan and Singapore. Before the pandemic, China held the title of the world‘s largest outbound travel market, with more than 150 million travellers. Three years of severe Covid restrictions have reduced this number to virtually zero.
However, with the first full reopening since 2019, the country’s tourism sector looks set to recover: second McKinseyIf China’s air travel follows a recovery pattern similar to Hong Kong’s, China could see four million air passengers a month by the end of April 2023.
Back to profit in 2023?
Iata forecasts a return to profitability for the global airline industry in 2023, as airlines continue to reduce losses resulting from the effects of the Covid-19 pandemic on their businesses in 2022. airlines should register a small net income of $4.7 billion with a net profit margin of 0.6%. This is the first profit since 2019, when industry earnings were $26.4 billion.
“Despite the economic uncertainties, there are plenty of reasons to be optimistic about 2023. Lower oil price inflation and continued pent-up demand should help keep costs in check as the strong growth trend continues. At the same time, with such narrow margins, even an insignificant shift in any of these variables has the potential to shift the balance into negative territory. Vigilance and flexibility will be key,” he said William Walshdirector general of IATA.
Potential annual return of 15.6% with 40% barrier
An alternative way to invest in the air transport sector is to use investment certificates, such as the Low Barrier Cash Collect registered BNP Paribas recently issued on the SeDeX of Borsa Italiana. These Certificates are structured on Worst Of baskets of shares and offer potential monthly premiums with a memory effect equal to a yield between 0.70% (8.40% pa) and 1.40% (16.80% pa) . Furthermore, at maturity after three years, they guarantee protection of the nominal capital in the event of a decline in the underlyings up to the barrier at maturity (which varies from 30% to 50% of the initial value).
Among the 16 new Low Barrier Cash Collects we also find the Certificate (ISIN NLBNPIT1OXU2) on the basket made up of three major airlines such as Air France-KLM, American Airlines ed EasyJet. The product offers a monthly premium with a memory effect of 1.30 euros (equal to 15.6% per year). To collect the coupon, it is sufficient for all the shares in the basket to be equal to or higher than the Premium Barrier level, set at 40% of the initial value of the respective underlyings. Furthermore, starting from the month of June, the memory effect comes into play which allows the investor to receive, on a valuation date, a cumulative premium including all previously unpaid coupons, if the conditions are met on that valuation date. conditions for receiving the prize.
Possibility of early repayment and maturity scenarios
Starting from October then, if on the monthly valuation dates all the shares in the basket quote at a value equal to or higher than their respective initial value, the certificates expire prematurely. In this case the investor receives the nominal value (100 euros), the monthly premium (1.30 euros) and also any previously unpaid coupons.
At maturity (April 20, 2026), if the early repayment has not occurred, there are two possible scenarios:
- if the price of all shares is equal to or higher than the barrier level at maturity, the Certificate repays the nominal value plus the memory premium;
- if the quotation of at least one of the underlyings is below the Barrier level at Maturity, the Certificate pays an amount commensurate with the performance of the worst stock (with consequent partial or total loss of the invested capital).
Quotes still at a discount according to analysts
The consensus gathered by Bloomberg on the three titles in the basket, which we report in the table above, is essentially positive. More than half of the analysts who follow Air France-KLM and EasyJet recommend the purchase (buy) on these stocks with a small minority suggesting a sell. On eBay, on the other hand, there is a prevalence of analysts who recommend keeping the shares in the portfolio (hold) with respect to buy and sell judgments.
Furthermore, the 12-month average target price indicates that currently these stocks appear underpriced and from which analysts expect potential upsides of between 20% and 40% within the next 12 months.
This makes the underlyings of the basket suitable for strategies with a Low Barrier Cash Collect Certificate, i.e. for those who have one lateral or moderately bullish view of a certain sector (in this case the aviation sector) to obtain an attractive yield at the time of early maturity.
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