Moves by non US Americas airlines to shore up their business in the face of plummeting passenger demand have been dealt a further blow by a stronger US dollar, according to analysts Cowen.
Air Canada, and Mexican LCC Volaris have all announced significant moves to reduce to flight capacity and reduce headcount – either temporarily or permanently – in recent weeks.
But with the flight to safety among global investors driving the Greenback up against most major currencies and the majority of carriers’ costs being dollar denominated, FX headwinds present an additional problem for airlines in cash conversation mode say Cowen.
Both Canada and Mexico are oil producing states and therefore carriers in their respective countries have been hit with the double shock of an oil price war and Covid 19. On March 30 for example the Mexican peso was trading at 23.8141 against the dollar, versus 15.59 on March 3 – a 21% fall and the biggest decline since 2008.
The decline in the Canadian dollar has been less severe over the same period with the loonie falling from 75 to 71 cents against the US dollar, however this still presents an issue for Air Canada to maintain its financial strength say Cowen.
“The airlines are doing their best to conserve cash but aircraft rent, and maintenance expense are US dollar denominated. There is likely little the airlines will be able to do to limit headwinds from aircraft rent - could ask for deferrals but rent will still be due at some point”, said Cowen.
“Maintenance expenses will likely be brought down materially as airlines look to exit older expensive aircraft and scale back on near-term maintenance events as huge portions of the fleet are not flying. The strengthening US dollar isn't the end of the world but rather another bad guy on a pile of endless bad guys the airlines are currently facing.”
However, Cowen had a positive take on Volaris’ prospects versus other carriers in the Mexican market.
“Volaris is the largest domestic airline in Mexico and has driven significant increases in travel given their simulative fares. Volaris is also in the best financial shape relative to their competitors in Mexico. We expect the Mexican aviation market to emerge with fewer competitors, but expect Volaris to be a survivor,” said Cowen.