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Airlines Tap Into The Public Markets As Travel Prepares To Rebound 

After a brutal year for the travel and hospitality industry, things are looking up with the COVID-19 vaccine rollout. And as the travel industry prepares for a rebound in the second half of 2021, some companies are tapping into the public markets to raise capital and prepare for a surge in demand. 

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Most notably, Sun Country Airlines and Frontier Airlines, both ultra low-cost carriers, filed to go public in February and March, respectively. Sun Country Airlines, which was owned by Apollo Global Management, made its public debut earlier in March, and Frontier, which was acquired by Indigo Partners in 2013, is slated to begin trading this week. 

These airlines are trying to capitalize on investor enthusiasm and pent-up travel demand as vaccine distribution ramps up, according to Patrick Healey, founder and president of financial advisory and wealth management firm Caliber Financial Partners.

“Investor sentiment is driving the appetite for companies to tap into the public markets through an IPO, like Frontier or Sun Country,” Healey said. “A lot of the more established airlines like United or American or Delta have done secondary offerings … more as a means to survive the pandemic and sustain themselves into the future when they can start to see more demand from airline travel again. We’re starting to see that again.” 

For context, Sun Country Airlines was the first U.S. passenger airline to go public in more than two years, according to CNBC. The public markets reacted enthusiastically to its debut, with its stock opening 51 percent above its IPO price on its first day of trading on March 17. The company raised $218 million through its IPO, pricing its shares at $24 apiece, above its stated price ranges.

Investor interest is shifting away from high-growth companies that benefited from a remote world during the COVID-19 pandemic to industries that suffered but are now due for a rebound, according to Louis Cordone, senior vice president of strategy at AST, a tech-enabled professional services firm. Simply put: Investor interest is cyclical.

“As the economy gets back on its feet, as it gets stronger, there are going to be companies that did not perform well during the COVID era, but now they’re poised to do well,” Cordone said. “Restaurants, hospitality, airlines. Everyone who I know who has been cooped up in their house wants to go somewhere badly.” 

Additionally, airlines and manufacturing companies have the benefit of using new technologies, tools and manufacturing methods that have been developed during the pandemic, since that’s where investors were putting their money, according to Cordone. So not only are airlines undervalued, they’re poised to operate well with the new technologies that have been developed over the past year.

Airlines took a beating during the pandemic, though ultra low-cost carriers like Frontier and Spirit fared better than the more expensive, larger airlines. Frontier noted this in its S-1 filing, writing that it incurred about $1 per passenger of debt-related costs, compared to the average of $16 per passenger for “other U.S. airlines of significant size” for debt that was issued between March and the end of 2020.

“Furthermore, we believe that low-cost airlines have historically recovered more quickly than the airline industry overall following past crises, including the 1991 Gulf War, the 2001 Terrorist Attacks and the late-2000s Financial Crisis,” the company wrote. “ In the wake of these crises, low-cost airlines further expanded the magnitude of their superior margin profile and profitability relative to the airline industry as a whole.”

In terms of travel in general, this year is going to be a “tale of two halves,” according to James Hardiman, an analyst at Wedbush Securities who covers the leisure industry. Many people likely won’t be comfortable traveling during the first half of the year, he said.

“Travel bookings — I think we’re seeing this across airlines, I know we’re seeing this across hotel bookings and cruise lines bookings — really do suggest people think they’ll be more comfortable traveling by summertime,” Hardiman said.

The online travel companies and theme parks Hardiman follows are anticipating increased demand this summer, and cruise lines are preparing for the worst but hoping for the best by lobbying the government to reopen and raising more capital. 

“I think it’s safe to say that 2021 as a whole, and even in the summertime, is going to be substantially better than 2020 in terms of the travel industry, but still meaningfully short of where we were in 2019,” Hardiman said.

Of course, the risk remains that a continuation of the pandemic could derail travel companies’ plans for a rebound. Frontier noted the COVID-19 vaccine rollout as a risk factor in its S-1 filing.

“We are depending upon a successful COVID-19 vaccine, including an efficient distribution and sufficient supply, and significant uptake by the general public in order to normalize economic conditions, the airline industry and our business operations and to realize our growth plans and business strategy,” the company wrote.

So far, 137 million doses have been given in the United States, according to Bloomberg’s vaccine tracker. President Joe Biden set a goal of administering 200 million doses of the COVID-19 vaccine shots in his first 100 days in office. 

One thing to watch, Healey noted, is how business travel will return. It seems clear that there’s plenty of pent-up demand for leisure travel — we could all use a vacation after a difficult, isolating year. But it’s unclear how business travel will rebound now that companies have adjusted to working remotely and conducting meetings over Zoom. If business travel doesn’t bounce back, that could be bad for airlines, as business travel is a more high-margin business than leisure travel.

Healey thinks hospitality companies could piggyback off the airlines’ strategy to turn to the public markets to raise capital, even on a secondary basis.

“There is pent up demand for travel, probably more on the leisure side, and I suspect that some of the hotel operators may want to raise capital now that the worst of it, knock on wood, is behind us,” he said.

Illustration: Dom Guzman

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