The first half of 2020 was a difficult time for aviation stocks listed on the Singapore Exchange (SGX). Shares of Singapore Airlines (SIA), SIA Engineering and SATS had crashed to multi-year lows as the Covid-19 pandemic brought air travel to a near standstill.

But as the year draws to a close, all three stocks have clawed back from the bottom. SIA Engineering has climbed more than 20% from its November low of $1.61, though it is still down 28.2% year-to-date as of Dec 14. Similarly, SATS has jumped more than 30% from its November low of $3.07, though it is also down 17.4% year-to-date as of Dec 14.

However, SIA has done much better. The stock has rebounded completely from the March 23 low of $2.09 and made further gains. It is now up 28% from the start of the year.

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The recovery in aviation stocks can be largely attributed to the positive news on the development of several Covid-19 vaccines. On Nov 9, Pfizer and BioNTech announced that their jointly developed experimental Covid-19 vaccine is over 90% effective in eliminating the virus. On Nov 16, Moderna also announced that its Covid-19 vaccine could be up to 94.5% effective in eliminating the virus. Moreover, on Nov 23, AstraZeneca announced that its Covid-19 vaccine has an average efficacy of 70%.

Several countries have approved the usage of the Covid-19 vaccines. The US, UK, Bahrain and Canada were among the earliest countries to greenlight the Pfizer-BioNTech vaccine. On Dec 14, Singapore also approved usage of the vaccine. The first shipment of the Pfizer-BioNTech vaccine is expected to arrive in the citystate before the year is up.

Singapore could also approve usage of vaccines manufactured by the other pharmaceutical companies. The government placed “multiple bets” to sign advance purchase agreements and make early down-payments for the most promising candidates, including Moderna and Sinovac Biotech. “We made arrangements with pharmaceutical companies to facilitate their clinical trials and drug development in Singapore, and attracted a few to establish vaccine manufacturing capabilities here,” Prime Minister Lee Hsien Loong said in a Dec 14 speech.

While the vaccine-related developments are welcome news, market observers tell The Edge Singapore that it is still early days before a meaningful recovery occurs in the aviation industry. In other words, a resumption in mass air travel will not likely happen in 2021.

“Of course, currently there are promising vaccine projects. But from a realistic perspective, it will take years until we see comparable vaccination levels globally. Therefore, industry recovery depends on governmental regulations, airlines’ ability to adjust their processes and… rigid cost control,” say Hannes Müller, managing director and head of markets Europe and Asia-Pacific, and Lars Wendel, senior consultant and stream lead airline transformation, at Lufthansa Consulting.

Brendan Sobie, an independent aviation analyst and consultant, shares a similar view. “The vaccination rollout will be quite a long period and very gradual. So, it’s not like we’ll see a snapback in full passenger traffic within next year. I think it’s still likely to be at a significant reduction in levels, even at the end of next year,” he says.

Vaccine hurdles

As many market observers have pointed out, an effective Covid-19 vaccine is key to a sustainable recovery in air travel. The mass production and delivery of such a vaccine could persuade countries to ease travel restrictions and open their borders in a big way. It would also bolster the confidence of travellers to fly again.

However, as of mid-December, the number of countries that have allowed the use of vaccines on their people are in the vast minority. Even if more countries eventually give the green light, the logistics of obtaining and delivering the vaccine to the masses will take time. Moreover, there is still lingering uncertainty over the safety of the vaccines.

For instance, two people in the UK developed an allergic reaction to the Pfizer-BioNTech vaccine. This led the Medicines and Healthcare Products Regulatory Agency (MHRA) to warn that “people with a significant history of allergic reactions” should not take the vaccine for now. Health Canada also came out with the same warning.

“The science around the vaccines is still developing — for instance, its effectiveness and how long it keeps the recipient vaccinated,” says Lim Boon Chai, managing partner at To70.

In the meantime, the International Air Transport Association (IATA) has been trying to develop an alternative means of reinitiating air travel called the IATA Travel Pass Initiative. Since many countries are using testing to limit the risk of importing Covid-19 cases, the IATA Travel Pass will manage and verify the secure flow of necessary testing or vaccine information among governments, airlines, laboratories and travellers. This would allow eligible travellers to fly without quarantine and having to receive the vaccine.

Lufthansa Consulting’s Müller and Wendel reckon the travel pass is generally a step in the right direction towards supporting airlines in regaining customers’ trust. But the effectiveness, they say, will depend on a combination of user-friendliness, information accuracy and data protection, as health data are highly personal information. “Therefore, there is still a lot of work for IATA to roll out this platform and establish it as an accepted tool for passengers,” they add.

Shukor Yusof, founder and analyst at aviation advisory firm Endau Analytics, is less optimistic though. “It will be effective only if the vaccine works according to plan and if people can be quickly persuaded to get onboard a plane and fly,” he says.

What about air travel bubbles (ATBs)? Singapore and Hong Kong were supposed to begin both essential and non-essential flights between both cities on Nov 22. The Singapore-Hong Kong ATB, if implemented, was touted to be a potential model for subsequent ATBs elsewhere. But now it has been postponed twice given the recent spike in Covid-19 cases in Hong Kong. The exact start date of the ATB arrangement will be reviewed in late December, according to the Civil Aviation Authority of Singapore.

Joshua Ng, director at Alton Consultancy Singapore, believes the implication of the delayed ATB for Singapore and Hong Kong is greater compared to other countries given that both cities do not have a domestic market. “So, SIA and Cathay Pacific Airways, as well as their respective airports, will not see a boost from increased travel,” he says. But globally, there are no wider implications, he believes.

‘It will get worse before it gets better’

Given the muted outlook, many companies operating in the aviation sector are likely to face another tough year. Endau Analytics’ Shukor says there is a “high chance” of more airlines going bust — including leasing companies — in the first quarter of 2021. “In a nutshell, it will get worse before it gets better, which will be from 2022 onwards,” he says.

To70’s Lim says in-flight caterers will probably have more flexibility in deploying their assets into complementary businesses. However, maintenance, repair and operations service providers would remain idle without aviation activity, given that they tend to use more specialised equipment and tools.

So, what should investors do? DBS Group Research has turned more cautious on SIA. The brokerage says it now believes SIA’s traffic trajectory will recover to only 67% of pre-Covid-19 levels by end-2021, compared to its previous assumption of normalisation. This is given the second wave of infections and record high of new Covid-19 cases in Europe and the US and that deployment of any vaccine will take time.

DBS expects SIA to record a loss of $4.5 billion in FY2021. The losses will narrow to $130 million in FY2022, before recovering to a profit of $318 million in FY2023, it says. The brokerage believes that SIA’s share price has run ahead of fundamentals. Hence, it has downgraded the stock to “fully valued” from “hold” previously, with an unchanged target price of $3.60.

CGS-CIMB Research says it is cautious on SATS’s prospects. The brokerage expects the inflight caterer’s revenue to improve to 70% of pre-Covid-19 levels by FY2022, while that of its associates should hit 80%. It adds that a full recovery is more likely to occur in FY2024, compared to general market expectations of that happening in FY2023.

“We think that as airlines navigate the resumption of flights in a post-Covid-19 world, cash flow and profitability are crucial to staying afloat. Therefore, we expect to see some margin pressure on in-flight catering and ground handling service providers, like SATS, which may delay the recovery to normalised profits,” says CGS-CIMB in a Dec 9 note.

UOB KayHian (UOBKH) has remained less convinced of SIA Engineering’s ability to make a turnaround post-Covid-19. The brokerage believes that the company is facing structural challenges, which have been heightened by the pandemic.

Even prior to that, UOBKH says SIA Engineering had struggled to make its main airframe business profitable. It points out that the company’s recent acquisition of the remaining 35% stake in its Philippines’ heavy airframe business has not made a material difference to earnings since 2008.

Moreover, the company’s fortunes are dependent on SIA’s recovery, which remains uncertain, it says. The associate’s thin margin, coupled with exposure to a mature engine type that is unlikely to return to service, do not lend much confidence to its longer-term outlook, the brokerage adds.

Hence, UOBKH has downgraded SIA Engineering to “sell” with a lower target price of $1.52 from $1.89 previously. The brokerage believes that the stock price is likely to head towards book value if earnings do not recover in FY2022.

A viable and effective Covid-19 vaccine may provide lift to SGX-listed aviation stocks. But the journey towards a sustainable recovery in the aviation industry will be long-haul. So, investors, buckle in