European airlines are showing signs of recovery, with profits back at 2018 levels. However, high leverage is undermining their financial resilience. An investment in these bonds therefore requires careful consideration, especially given the currently low risk premiums.
European Airlines: Profits and Improved Ratings After the Pandemic
Some companies even managed to exceed their 2018 profits, with the continued improvement in their financial position leading to rating upgrades. Particularly noteworthy is the return of IAG and Lufthansa to investment-grade ratings after they were temporarily classified as high-yield companies during the crisis. Both companies have issued bonds in recent weeks for the first time since 2021.
Hardly Any Equity Buffer Left
Does the Implicit Government Guarantee Protect Against Spread Widening?
In our view, this is hardly reflected anymore in the current credit risk premiums, which have now fully converged with the overall market. We assume that investors now attribute an implicit government guarantee to the sector—one that saved the airlines from bankruptcy during the last crisis.
In our view, this will not be able to protect the bonds from a widening of credit risk premiums but will only come into play at significantly higher levels. Therefore, at HAGIM, we emphasize the need for sound selection expertise to invest successfully in this challenging industry.
Risks
Price losses due to rising yields and/or increased risk premiums are possible. Even a total loss cannot be ruled out. Past performance is not indicative of future results, nor can future performance be guaranteed.
Disclaimer
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