I have a tendency to write stuff that hits a nerve with some, but before I wrote this piece I didn't expect the incredible whinging-tsunami I'll get from readers, mostly from those who claim they work in the aviation industry. So, if you are from the industry, or you don't like being presented with unsettling/uncomfortable ideas, stop right here, no hard feelings.
"I am not sure about you, but personally, I feel very hesitant to get on an airplane anytime soon". This is how I started an article 5 months ago to share my concerns with my copiers and followers on eToro about the general airworthiness of the aircraft out there.
An increasing number of articles on this topic that recently surfaced at places from Reuters to Simpleflying confirm that this matter needs more attention, so I think it's time for brushing up on this topic and for taking a closer look on the many red flags that have been raised lately.
Ever since airlines have been forced to ground their fleets en masse there has been little attention paid to the issues, despite it is obvious that parking a jet is not really the same as parking a car.
It takes hundreds of hours to prepare one single aircraft for mid-term storage, and you can't just simply line them up in a row and call it a day, regardless of those photos in the media suggesing that.
Earlier this year, Brussel Airlines published a great article on this entire process, and although it is not overly detailed, gives a fairly clear picture of what airlines dealing with.
Plus, these 'birds' require on-going maintenance to keep them in good shape, including 'revving' the engines at least once a week, servicing all parts and hydraulics in order to avoid corrosion, packing landing-gear pits and other accessible areas airtight so no animals can nest in them... the list goes on and on.
From an airlines' point of view, it is not only painful to get this done when planes go on storage, but also cost a lot of time and money to get them ready to fly again. Hundreds of various checks, tests and inspections needs to be done before an aircraft gets signed off and can return to duty. Or at least, it should be this way.
"Captain, we got a bug problem!"
Here is an example that surfaced in November, in an incident report involving a Wizzair flight earlier in June this year, showing that those checks are not always carried out to the fullest extent.
Long story short, an Airbus A321 from a 12-week 'ready-to-fly' storage was just about to take off when the pilot noticed that the airspeed sensor reading is zero.
There are two explanations for this. A) The pilots had too much LSD or B) something went wrong with the sensor.
For aviation-junkies like me: the sensor dropped to zero from 120 knots, just 8 knots before reached the 'no-way-back' point, from where it would not have been possible to stop the aircraft on the runway. Imagine something like this occurs at cruising speed mid-air, or even worse, during landing approach.
After they aborted the two take-off attempts and carried out an inspection, they have found insect larvae in the sensors in question. Yikes. Those who are interested in further details, Aerotime Hub wrote a piece on this here.
This story is particularly alarming because it happened to a very young aircraft (bit more than one year old), with an airline whose planes were regularly maintained by their leasing company and following only a 'short' period in storage.
Based on this, I do not want to imagine what is the case with a 15-year-old Boeing 737 that was parked 9 months ago by Ryanair.
Mentioning Ryanair... This summer, the FAA has come up with an urgent, mandatory safety test and inspection for each and every Boeing 737s that fly with the engines called CFM56-3 and CFM56-7.
The reason behind this is that there has been an increasing number of mid-air single engine failures recently on 737s that freshly returned to the skies after being grounded for a few weeks/months.
Sorry if I get a bit too technical, but if you want to make good investment decisions you need to understand risks, and in order to do so sometimes it is necessary to get elbow-deep in boring details.
As we now, the devil hides in the details. So, back to the technical stuff. What the FAA report found is that due to the prolonged time spent in storage, the so-called 'engine air bleed's fifth valve tends to corrode and either stuck or bend that makes it unable to close. If this happens mid-air the engine shuts down, as it was confirmed on at least four occasions and luckily no tragedy happened.
The reason why it didn't received too much attention is mainly that on all occasions the problematic engines could have been restarted, but if there is a dual engine failure, restart isn't an option.
I think it is needless to say how 'unpleasant' it could be to lose both engines at 25000 feet?
Rusty Pilots Falling Out of Practice
Besides mounting technical issues, reports have been surfacing lately pointing to an increasing number of so-called 'unstabilized approaches', that is directly linked to pilots being a bit rusty. Just like parking an aircraft isn't the same as parking a car, 'driving' it isn't the same as getting back on a bicycle.
Yes, many pilots are provided with time in the simulator to stay on the top of their game, but what about those thousands who have been sent on 'voluntary leave'? I bet they do not have the access and the opportunity to stay in shape.
Then, there is air traffic control. Those guys are used to be under serious pressure day in day out, but after having spent almost a year 'wank*ng', they might not be as up to speed as before.
I appreciate many would argue this claiming that recovery will be gradual so people will get the time to adopt. This strongly contradicts the bull-thesis that says airline will see a roaring comeback of demand, and I seriously doubt that when restrictions are lifted and thousands will rush to buy tickets any airline CEO would say: "Easy people, we have to take it easy on our staff and aircraft". Nah, don't think so.
Let's just put this straight, shall we? As air travel recovers hundreds of aircraft in questionable condition will hit the air, flown by rusty pilots and controlled by just as rusty air traffic operations. What could go wrong?
All of this can be easily avoided if airlines do their due diligence properly, spending the appropriate amount of time and money on maintenance and staff training.
I’d like to think this is the case, but it is hard to believe after seeing how nasty most of them get when it comes to refunding customers or laying off their pilots.
It takes a healthy dose of naivety to believe that airlines that treat their customers and employees like this and currently are under serious financial pressure doesn't try cutting corners when it comes to maintenance.
I guess a few people will label this as nonsense and think that I am here to scare people. Honestly? If common sense scares you, then there isn't really much to discuss.
But this actually raises a very valid question from an investment point-of-view: If such a risk is so obvious, why are investors blind to it? The answer is along the lines of...
Psychology Comes To Play
The human brain is wired in wicked ways. By default, we are much more receptive to positive things than to negative stuff. When confronted with negative ideas or concepts, risks or dangers, many people's first reaction tends to be an automatic rejection.
In other words, humans tend to accept positive narratives even when those are questionable instead of confronting a thought that gives them discomfort.
You can see this happening in all areas of life, but when it comes to investing, it is particlarly dangerous, because it tricks people into believing that there are only positive things out there that could impact their investments.
And what could be more discomforting than facing the possibility of an aircraft accident, that doesn't only claims hundreds of lives but also sends related investments into a nosedive? (sorry, no pun intended)
Believe me, I do not want to paint the devil on the wall, and I truly wish I will be proved to be wrong over time, but I wouldn't be surprised if there was an ‘event’ that will be traced back to poor maintenance or lack of routine. And by ‘event’, I mean what the FAA thinks could happen: “A forced, off-airport landing’.
Needless to say how could this impact an airline-heavy portfolio. Even worse, if it happens involving Boeing or particularly the daunted 737 MAX, then that could mean pretty much the end of the runway for them.
Again, I wish such a thing never happens, but there is definitely an extra layer of risk here that seemingly flies under the radar (this time pun intended), and investors should be well-aware of and prepared for it.
Accidents Are Not The Only Threats
Although obviously accidents are the worst things in aviation (closely followed by in-flight entertainment and overpriced peanuts), this is not the only risk that investors should be aware of.
Airlines have insurance policies in place for a case of an accident, and even if investors or the flying public doesn't take things serious, you can be hell sure that actuaries and underwriters do.
Insuarance companies doesn't need an accident to significantly increase insurance premiums, but if there is one, rates explode, just like they did following the two MAX crashes.
Giving that the risks that are derived from the above reasons, like poor maintenance and training issues much more broadly affecting almost every airline, it is fair to say that these increasing insurance costs can and will further damage balance sheets. Like airlines don't have enough financial problems anyway.
Alternative Ways to Benefit From Aviation Recovery
Personally, I am very careful with my aviation investments at the moment. I hold small long positions in Wizzair and Spitit Airlines, and I have a short bet on IAG, and I have no intention to going any further than these.
However, I believe there are viable alterniative out there for those who want to profit from the air travel recovery without being exposed to the above risks.
There are companies out there whose business is directly or indirectly related to the (un)fortune of aviation, and most of these are not even half as overpriced as airlines today.
Without going too much into details and balance sheets, here are a few ideas to look at
Airports - Presumably it isn't needed to explain this too much. The pandemic damaged not only the carriers, but the infrastructure that serves them. Companies like Fraport or Aeroports de Paris could worth a closer look, giving that unlike airlines, bith of these are a) in much better financial shape and b) much more attractively priced
Retail and Supplies - An airport is basically a huge shopping center surrounded by runways. For many companies, the revenue generated at their airports branches make up a significant portion of annual results. Once happy travelers (aka shoppers) return, businesses will like Starbucks or Estee Lauder could see a notable spike in sales, and same could happen to payment processing companies like Amex or Visa.
Aircraft Leasing Companies - If there are any 'winners of the pandemic' within the aviation industry, then those are definitely the leasing companies. The virus turned this lesser-known subindustry into a gold mine, and delivered thousands of lucrative long term contracts. AerCap and BOC Aviation are both great ways to get exposure to the money rain.
Car Rental companies - Remember those scenes when thousands of cars were lined up around the airport, with vehicles closely packed as far as you could see? The recovery of air travel will inevitably bring the resurrection of this beaten-down industry. Finding the right bet might be tricky but not impossbile with Avis being overpriced and Hertz in the middle of financial restrucuring that could go either way.
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