Unloved during the pandemic with their business paralyzed almost overnight, airlines that cut back to survive the crisis are now blowing through profit forecasts and luring back investors.

Virgin Australia, so financially frail when Covid-19 hit in 2020 that it folded in weeks, has undergone a remarkable transformation under new owner Bain Capital. Free of much of its debt after exiting administration and with a scaled down fleet, the airline is making money for the first time in years. It plans to re-list in Sydney, possibly this year. 

These freshly — and forcibly — streamlined carriers are capitalizing on a surge in travel since virus restrictions fell away. The International Civil Aviation Organization expects passenger demand to recover to pre-Covid levels on most routes this quarter and then to about 3% higher than 2019 levels by year-end. 

“Aviation is investible again,” said Jun Bei Liu, a portfolio manager at Tribeca Investment Partners in Sydney who oversees A$1.2 billion ($822 million) in funds. “Asian airlines are going to go through the roof.”

A Bloomberg gauge of 29 airlines from around the world has climbed almost 30% since the end of September. 

The reopening of China, the largest outbound travel market before the pandemic, should drive a fresh traffic rebound in and out of favored destinations like the U.S., Japan and Singapore. In Hong Kong, hammered by China’s shutdown, Cathay Pacific Airways Ltd. will this year make its first profit since 2019, according to analyst forecasts.

It’s an extraordinary turnaround for an industry that suffered losses approaching $200 billion over the past three years. Tens of thousands of pilots, flight crew, ground workers and back-office staff lost their jobs, while facilities in Californian and central Australian deserts filled up with unwanted aircraft. 

Carriers will generate profits of $4.7 billion in 2023, according to the International Air Transport Association. While that’s a fraction of the $26.4 billion airlines made in 2019, key financial ratios indicate the industry is on its soundest footing in years. 

The ability to repay debt using earnings, for example, is back to pre-pandemic levels and will strengthen through 2025, according to data compiled by Bloomberg. That means airlines are more able to weather periodic demand shocks, like the one that undid Virgin Australia, and less likely to default.

“Considering the doom and gloom forecast during the pandemic, the industry is doing quite well,” said Volodymyr Bilotkach, associate professor in aviation management at Indiana’s Purdue University and author of the book The Economics of Airlines. “Following crises, some airlines emerge in better shape than before.”

Supply and Demand Shift

What’s different now is the huge gulf between limited available seats on aircraft and the public’s strong appetite for travel, which is allowing airlines to supercharge fares.

“The supply-demand dynamics are as different than they’ve ever been in my career,” said Scott Kirby, CEO of United Airlines Holdings. “Every data point keeps demonstrating it over and over again. I think margins across the board are going to be higher.”

American Airlines Group Inc. CEO Robert Isom said navigating the pandemic had made the carrier more efficient — its fleet is simpler and the network focuses on the most profitable flights. “This is our best-ever post-holiday booking period,” he said. “We expect the strong demand environment to continue in 2023.”

The demand surge coincides with constrained labor supply. For many passengers, that’s translated into long queues at understaffed check-in counters or lengthy waits at baggage carousels. For investors, it means some of the airlines they own are generating more than twice as much revenue per worker than they were two years ago.

Ryanair Holdings Plc, Europe’s largest discount airline, returned to profit in the quarter through December and sees no end to its lucrative run. “We will deliver record profits in the current financial year and we would expect to continue to grow profitably into next year and beyond,” Chief Financial Officer Neil Sorahan said. The Dublin-based airline ordered dozens of fuel-efficient Boeing Co. Max jets during the slowdown. 

Australian Rebound

Virgin Australia provides perhaps the sharpest “then-and-now” contrast. For the best part of a decade before the pandemic, the airline reported annual losses, burned through shareholder capital each year, and occasionally asked investors for more money. Under Bain’s ownership, Virgin Australia has cut thousands of jobs, got rid of long-distance planes, and now flies only shorter-haul Boeing 737s. CEO Jayne Hrdlicka — former boss of Qantas’s low-cost airline Jetstar — has reined in spending on lounges and scaled back international routes.

“Their cost management is far superior,” said Neil Hansford, chairman of Australian consultancy Strategic Aviation Solutions. “Virgin is skinnier.” 

Now the airline is planning what could be one of Australia’s biggest listings of the year. Bain has picked Goldman Sachs Group Inc., UBS Group AG and Barrenjoey Capital Partners Pty as lead managers for the possible share sale.

In an email to staff on January 31st, Hrdlicka said revenue was about A$2.5 billion in the six months through December, with a profit margin of around 5%. The airline’s first profit in years “is certainly a milestone to quietly celebrate,” she wrote.