“In addition, the shares have already done poorly over the last year, thanks in part to the dispute with the unions and the prospect of rising costs.
“Investors must now make sure that the tailwinds which have done so much to lift the airlines sector in the UK, Europe and around the world do not become the sort of headwinds which could make for bumpier operating and share price performance going forwards.”
Share price change | ||||
| 1 year |
|
| 5 years |
Wizz Air | 61.0% |
| American Airlines | 647.9% |
Lufthansa | 50.9% |
| Dart | 324.5% |
China Southern | 46.7% |
| Qantas | 280.7% |
SAS | 41.4% |
| SouthWest | 265.5% |
China Eastern Airlines | 39.0% |
| Delta | 179.7% |
easyJet | 37.9% |
| International Consolidated Airlines | 144.1% |
Dart | 33.1% |
| Wizz Air | 142.1% |
Air China | 31.6% |
| Ryanair | 128.9% |
Qantas | 28.7% |
| China Eastern Airlines | 121.9% |
Japan Airlines | 22.0% |
| China Southern | 114.1% |
Singapore Airlines | 18.9% |
| United Continental | 99.1% |
Norwegian Air Shuttle | 15.4% |
| SAS | 56.9% |
International Consolidated Airlines | 14.9% |
| Lufthansa | 53.8% |
Cathay Pacific | 11.6% |
| easyJet | 43.3% |
Delta | 9.2% |
| Air China | 41.9% |
FlyBe | 6.8% |
| Singapore Airlines | 8.4% |
American Airlines | (6.1%) |
| Air France-KLM | (2.7%) |
Ryanair | (7.3%) |
| Cathay Pacific | (8.0%) |
SouthWest | (11.4%) |
| Norwegian Air Shuttle | (13.3%) |
United Continental | (13.3%) |
| Japan Airlines | (21.9%) |
Air France-KLM | (22.7%) |
| FlyBe | (27.4%) |
Source: Thomson Reuters Datastream, to 21 May 2018
“Airlines and their shareholders must now address three issues which have each been helpful over the past five years, just to make sure they do not now become hindrances:
Oil. At around $80 a barrel the black stuff is nearly 45% more expensive than it was a year ago. Airlines can manage the impact of changes in the oil price by hedging and buying forward their supplies but these hedges eventually unwind. Hedging helped to trim Ryanair’s costs by 1% in 2017-18, as it locked in lower oil prices, and it is largely hedged at $58 a barrel for 2018-19. This is way below the prevailing oil price but still more than Ryanair paid last year and as a result the company expects unit costs to rise 9% this year.
Global consolidation. The airline industry in the USA embarked upon a huge round of consolidation over a decade ago and Europe has followed suit, to the benefit of the remaining, enlarged players.
In America, Delta merged with Northwest in 2009, United and Continental came together in 2010 and US Airways and American Airlines merged in 2013, leaving those three and Southwest as the dominant players in a consolidated market where greater capacity discipline helped pricing and profits.
Europe has seen a similar trend. British Airways, Iberia, Aer Lingus and Vueling now sit under the umbrella of International Consolidated Airlines, Air France has merged with KLM, Lufthansa mopped up Air Berlin after its failure and Monarch went in 2017, too, as easyJet and BA stepped in for its slots. There are also suggestions that Lufthansa is (bravely) looking at taking on the job of overhauling Alitalia.
Investors will be hoping that the airlines resist the temptation to start adding substantial amounts of fresh capacity to help keep load factors and pricing tight, especially at a time when fuel costs are rising.
Healthy demand. The global economic upturn since 2009 may have been tepid at best but global air travel demand continues to surge, helped by improved economic conditions and a trend toward spending on ‘experiences’ and away from buying ‘stuff’. Some economists are starting to fret that the current economic environment is ‘as good as it gets’ and in the past demand for air travel has tended to be sensitive to the overall economic growth.
“For the moment, oil is probably the greatest cause of concern, which is remarkable given the airline industry’s history of epic capital destruction, which once prompted legendary US investor Warren Buffett to assert in his 2007 Letter to Shareholders: ‘Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favour by shooting Orville down.’
“Encouraged by consolidation and greater capital discipline, Mr Buffett’s investment vehicle, Berkshire Hathaway, now owns shares in Delta and Southwest and doubtless he and other investors in the industry will be hoping that the airline business does not return to type.”