Morgan Stanley
  • Wealth Management
  • December 6, 2024

Global Airlines – The New Luxury Good

Airline companies have traditionally been a challenging investment, but we believe the outlook has become more favourable especially for those premium carriers.

IMPORTANT NOTICE
This document only contains general financial advice, which has been prepared without taking into account your objectives, financial situation or needs and because of this, you should, before acting on the general advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs.

Rising long-term demand for premium tickets, combined with a reduced reliance on lower-margin economics of economy class, is driving improved profitability for these airlines. This trend is expected to continue, fuelled by the growing wealth of ultra-high-net-worth individuals and a shift in consumer preferences toward enhanced services and experiences rather than material goods.

As headwinds intensify for traditional luxury goods stocks, particularly due to concerns over Chinese demand, airlines present a more effective means of capitalising on long-term consumer demand growth trends. Following Morgan Stanley’s downgrade of several key luxury stocks in 2024, premium airlines emerge as an alternative for gaining exposure to secular luxury demand, especially given their current attractive valuations. In this context, we highlight two premium global carriers – Qantas Airways Ltd. (Qantas) and Delta Airlines Inc. (Delta) both of which are positioned to benefit from a more favourable outlook. These companies are better suited to navigate the evolving market dynamics compared to the challenges the broader airlines industry has faced in previous years.

Global airlines – the new luxury good

The airline industry has had its array of challenges in the past, however new trends towards premiumisation could mark a new earnings paradigm for the industry. While airline earnings have historically been dependant on the marginal economy seat for profitability, we believe earnings are increasingly being driven by luxury-style demand for seats in the premium cabins.

Premium tickets driving growth, better profitability

Premium airlines Qantas and Delta have both recently commented on consumer trends towards premiumisation, with rising levels of demand for the higher priced tickets in the Premium, Business and First Class cabins. Delta has disclosed the share of premium tickets in their earnings releases, indicating premium tickets are growing their share of revenues. The data shows that Delta’s Premium ticket revenues grew ~8% for the 9 months to the end of September 2024 year on year (YoY). This significantly exceeded the main cabin revenues which declined slightly over this period. Premium tickets have now reached ~40% of Delta’s total passenger revenues, up from ~29% in 2014, with the company indicating at their recent Investor Day that premium ticket sales would likely surpass the main cabin by 2027.

Similarly, Qantas’ International revenue per available seat kilometres (RASKs) are tracking at ~40% higher than pre-COVID during the current year, with the company noting strength in leisure demand, and specifically premium cabins.

With Delta suggesting the profit margin in the ‘front cabin’ are at least 15 percentage points higher, we believe this could become a secular driver of airline profits in the future, decreasing the reliance on less profitable economy seats. We believe this could potentially transform the economics of the aircraft and these trends are in turn, driving confidence in the earnings outlook, reflecting the changing supply and demand dynamics for the industry. At its recent Investor Day, Delta made clear that premium demand has a long way to go and spoke to a strong narrative around driving a higher yield from premium tickets, moving away from a ‘loss-leading’ model in the past driven by free upgrades.

Airlines offer increasing exposure to growing consumer wealth

Importantly, we believe this shift is being driven by one of the most compelling long-term demographic forces - the enduring growth of the affluent consumer. Trends that have driven the rise of the major luxury consumer goods brands in the past are becoming a material driver of airline earnings in a similar way. Investing in companies such as LVMH Moet Hennessy Louis Vuitton SE (LVMH) and Compagnie Financiere Richemont SA (Richemont) have historically offered exposure to the growing ultra-high net worth demographic, a highly desired growth theme to have in a portfolio. We contend that airlines are now becoming an alternate way of tapping into the demand of this demographic.

There has historically been a correlation between growth in US household wealth and spend on personal luxury goods and we believe that increasingly this relationship will also exist for airlines and premium ticket revenues. US household wealth continues to reach news highs, led in particular by the ‘Baby Boomer’ demographic and is a growing bracket which is increasingly choosing ‘experiences’ such as premium and luxury travel. We believe this underpins a growing opportunity for airlines that can sell to this target market.

Airlines investment shows confidence in the outlook

The seat layouts of new aircraft orders further demonstrates that airlines are anticipating these trends, with new aircrafts having higher seat allocations towards the premium cabins. Delta’s new A330-900neo planes, which are replacing the 767-300ER’s, have 49 more premium seats (out of total 281). Again, at the recent Investor Day, Delta flagged the A350-100 aircraft will have a 50% allocation to premium seats. This is a significant change from the era prior to 2010, when Delta had only a 10% premium seat mix.

Consumers are preferring travel experience over material luxury goods

Growing consumer preference for ‘experiences’ over tangible goods could provide a further force that favours airlines. This evolving consumer behaviour has been a long-term multi-decade trend. We are seeing further signs of this demand shift in 2024, where it appears high income consumers are preferring premium travel over luxury items like watches and handbags. Many luxury stocks have been reporting weaker sales, with LVMH recently recording negative sales growth for its fashion and leather goods in the US. In contrast, Delta’s premium ticket sales have grown ~8% YoY to the 9 months to the end of September this year, after growing 26% YoY in 2023.

Airline valuations are yet to reflect better profitability

While airlines can potentially benefit from the growing wealth of the affluent consumer, similar to luxury brands, we believe this is yet to be fully appreciated by the market. Despite the strong recent share price performance of Qantas and Delta, we believe both companies’ valuations are yet to break away from historic ranges (which we believe continue to imply the same previous challenging operating environment). Therefore, compared to luxury goods companies, airlines provide a much more attractive pricing avenue to gain exposure to the strong growth demographic and secular demand trends.

IMPORTANT INFORMATION

This communication provides market commentary and strategy ideas to clients of Morgan Stanley Wealth Management and its affiliates (the “Firm”). Such commentary and ideas are based upon generally available information. Although the information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, and such information may be incomplete or condensed. All opinions and estimates included in this document constitute our judgement as of this date and are subject to change without notice. Any prices used herein are historic unless expressly indicated otherwise and may not be available when any order is entered. Any price indications are not firm bids or offers, either as to price or size, and will not form the basis of or be relied on in connection with any contract or commitment whatsoever. This document and its contents are proprietary information and products of Morgan Stanley Wealth Management and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required by law. The information and opinions in Morgan Stanley Wealth Management Research were prepared by Morgan Stanley Wealth Management Australia Pty Ltd (ABN 19 009 145 555, holder of Australian Financial Services License No. 240813) ("Morgan Stanley Wealth Management"), and Morgan Stanley Wealth Management takes responsibility for the production of this report. Morgan Stanley Wealth Management’s Research Department produces and distributes research products for clients of Morgan Stanley Wealth Management. This Morgan Stanley Wealth Management Research is disseminated and available only in Australia. For important disclosures (including copies of historical disclosures) regarding the securities and/or companies that are the subject of this Morgan Stanley Wealth Management Research product, please contact Morgan Stanley Wealth Management Research, Level 26 Chifley Tower, 2 Chifley Square, Sydney NSW 2000, Attention: Research Management. In addition, the same important disclosures, with the exception of the historical disclosures, are contained on the Firm's disclosure website at https://www.morganstanley.com/online/researchdisclosures. Historical disclosures will be provided upon request back to June 1, 2009. In addition, please contact us if you require Morgan Stanley Wealth Management Research model portfolio performance figures for previous periods. Global Research Conflict Management Policy Morgan Stanley Wealth Management has a Conflict Management policy available at: https://www.morganstanley.com/online/researchconflictpolicies Morgan Stanley & Co. LLC Stock Rating System and Definitions For an explanation of Morgan Stanley's Stock Rating system and definitions, please refer to Morgan Stanley Wealth Management’s disclosure website: https://www.morganstanley.com/online/researchdisclosures Hybrid and Convertible Securities Rating System and Definitions The value of hybrid and convertible securities can be impacted by a number of events including but not limited to movements in credit spreads, secondary market liquidity, and relative attractiveness of hybrid returns versus other asset classes. Significant event risk can also impact the value of hybrid and convertible securities. These include but are not limited to credit adjustment by rating agencies, underlying entity fundamentals, changes in the tax and or regulatory environment, solvency issues surrounding the underlying entity and changes to the duration or maturity date. For a large number of investment grade securities, the rights to redeem, convert, change, and/or extend the terms lie with the issuer and not the holder of the security. Morgan Stanley Wealth Management cannot make an assessment on potential changes to terms until they have been announced by the issuer. Neither the capital value nor the distribution income of hybrid or convertible securities is guaranteed. In an event of default, hybrid securities may rank ahead of equity holders but behind debt holders in the winding up of an entity. For full terms and conditions of each hybrid or convertible security, including specific risks related to each security, refer to the prospectus or product disclosure statement available from your financial adviser. Morgan Stanley Wealth Management Research does not necessarily cover the underlying equity securities for hybrid and convertible securities mentioned in this report. Investment Risk Rating: Morgan Stanley Wealth Management’s hybrids and convertibles risk ratings assess the risk of each security based on a number of quantitative and qualitative factors, including the financial strength of the issuer, debt/equity ratio of the issuer, interest cover of the issuer, the issuer’s ability to pay distributions, conversion risk, dilution risk of conversion into equity, and duration risk. Risk ratings assess both the risk of the issuer and the specific risk of the actual security. An issue can be rated high risk for example, despite the issuer being of sound financial health, due to security specific terms which are security holder ‘unfriendly’, or there is a high degree of uncertainty (and therefore “redemption value”) on the exit and/or conversion conditions. Each security will then be given one of four ratings: Low Risk – a security is backed by an entity that has strong capacity to meet its financial obligations and commitments. The risk of the entity missing a distribution payment is considered low. Medium Risk – a security is backed by an entity that exhibits adequate protection parameters, however, adverse economic conditions or changes in circumstances could lead to a weakened capacity of the entity to meet its financial obligations. High Risk – a security is backed by an entity that is more vulnerable to adverse economic conditions which may lead to distributions being lowered or cancelled. A security may also be considered High Risk when the outcomes surrounding the maturity date are largely unknown. Speculative Risk – a security is backed by an entity that is highly vulnerable to adverse economic conditions. An entity may also be showing signs of financial stress. There is a high degree of uncertainty surrounding the entity’s ability to make a regular distribution payment. Other Important Disclosures The research analysts or strategists principally responsible for the preparation of Morgan Stanley Wealth Management Research have received compensation based upon various factors, including quality of research, investor client feedback, competitive factors, and firm profitability or revenues (which include fixed income trading and capital markets profitability or revenues). Research analysts' or strategists' compensation is not linked to the profitability or revenues of particular capital markets transactions performed by Morgan Stanley Wealth Management or the profitability or revenues of particular fixed income trading desks. Morgan Stanley Wealth Management and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Wealth Management Research. Morgan Stanley Wealth Management and/or its affiliates sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Wealth Management Research on a principal basis. This communication has been prepared solely for information purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The material contained herein is not intended to constitute investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To the extent this communication is deemed to contain any general financial advice, such advice is prepared without taking account your objectives, financial situation or needs and because of this, you should, before acting on the general advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If the advice relates to the acquisition of a particular financial product for which a target market determination (‘TMD’), product disclosure statement or other disclosure document (‘offer document’) is available, you should obtain the offer document and TMD relating to the particular product and consider these documents before making any decision whether to acquire the product. Morgan Stanley Wealth Management recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Wealth Management Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisers do not provide legal or tax advice. Each client should always consult his/her personal tax and/or legal adviser for information concerning his/her individual situation and to learn about any potential tax or other implications that may result from acting on a particular recommendation. Morgan Stanley Wealth Management Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The important disclosures contained on the Firm's disclosure website at https://www.morganstanley.com/online/researchdisclosures list all companies mentioned where Morgan Stanley Wealth Management or Morgan Stanley & Co. LLC owns 1% or more of a class of common equity securities of the securities/instruments of companies. Morgan Stanley Wealth Management or its affiliates may trade securities/instruments or derivatives of securities/instruments in ways different from those discussed in Morgan Stanley Wealth Management Research. Employees of Morgan Stanley Wealth Management not involved in the preparation of Morgan Stanley Wealth Management Research may have investments in securities/instruments or derivatives of securities/instruments of companies mentioned and may trade them in ways different from those discussed in Morgan Stanley Wealth Management Research. Morgan Stanley Wealth Management holds various roles in respect of financial products. Subject to the Conflict Management policy, Morgan Stanley Wealth Management may receive a fee (which may or may not be at an additional cost to the investor) from a product issuer which will be disclosed to investors prior to investments in relevant securities, instruments or strategies. Investors are strongly encouraged to consult with their financial adviser for further details to evaluate any potential investment. Morgan Stanley Wealth Management Research is based on public information. Morgan Stanley Wealth Management makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Wealth Management Research change apart from when we intend to discontinue equity research coverage of a subject company. Facts and views presented in Morgan Stanley Wealth Management Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley Wealth Management business areas, including investment banking personnel. The value of and income from your investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realised. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject company's securities/instruments. Morgan Stanley Wealth Management and its affiliates may make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. The trademarks and service marks contained in Morgan Stanley Wealth Management Research are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. Morgan Stanley Wealth Management Research, or any portion thereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley Wealth Management. Morgan Stanley Wealth Management Research is disseminated and available primarily electronically, and, in some cases, in printed form. This report was prepared solely upon information generally available to the public. No representation is made that it is accurate and complete. Additional information on recommended securities/instruments is available on request.

© 2024 Morgan Stanley Wealth Management Australia Pty Ltd.

View disclosures

MORE STORIES

Get Your Career Started At Morgan Stanley

Start Your Search