Air­line sec­tor still in the dan­ger zone as cost and op­er­a­tional pres­sures in­ten­sify

Shares in the air­line sec­tor have been poor per­form­ers this year

Shares - - BIG NEWS -

Dark clouds have been gath­er­ing over the air­line in­dus­try this year amid ris­ing costs, pric­ing pres­sures and dis­rup­tion from var­i­ous strikes in­clud­ing air traf­fic Table1, cabin crews and pi­lots.

Some com­pa­nies like EasyJet (EZJ) are manag­ing to over­come these prob­lems, yet oth­ers such as Ryanair (RYA) are clearly strug­gling.

Ryanair said ear­lier this week that wide­spread strike ac­tion had made pas­sen­gers think twice about fly­ing with the air­line, putting traf­fic and fares un­der pres­sure.

The strike ac­tion had a knock-on im­pact of sup­press­ing de­mand for ad­vance tick­ets cov­er­ing the Oc­to­ber half-term hol­i­day and the Christ­mas pe­riod.

Chief ex­ec­u­tive of­fi­cer Michael O’Leary wasn’t able to re­as­sure in­vestors that strikes would come to an end soon de­spite at­tempt­ing to re­solve the dis­pute with unions.

In con­trast to Ryanair, EasyJet has en­joyed a stronger per­for­mance this year due to de­cent de­mand for seats. The com­pany up­graded an­nual pre-tax profit guid­ance from £530m to £580m to a new range of £550m to £590m in July.

This is quite im­pres­sive when you con­sider French air traf­fic con­troller strikes caused thou­sands of flights to be can­celled ear­lier this year and cost the air­line £25m.

EasyJet has been tak­ing ad­van­tage of the col­lapse of ri­vals Air Ber­lin and Monarch, as well as prof­it­ing from hun­dreds of can­cel­la­tions at Ryanair, which helped off­set bad weather and strike ac­tion.

Last week the air­line con­firmed it would hit the up­per range of its pre­vi­ous profit guid­ance at £570m to £580m.

How­ever, we note that in­vest­ment bank Bern­stein has just down­graded EasyJet from ‘mar­ket per­form’ to ‘un­der­per­form,’ claim­ing earn­ings are ex­pected to drop 40% year-on-year in 2019.

Bern­stein ar­gues sig­nif­i­cant new ca­pac­ity of short-haul flights to Europe and surg­ing oil prices are un­likely to be off­set by EasyJet’s pric­ing power.

Keep an eye on the sec­tor as there will soon be more news flow. For ex­am­ple, British Air­ways owner In­ter­na­tional Con­sol­i­dated Air­lines (IAG) re­ports its third quar­ter earn­ings on 26 Oc­to­ber. It missed an­a­lysts’ con­sen­sus fore­cast for se­cond quar­ter op­er­at­ing profit be­cause of dis­rup­tion from the French air traf­fic con­troller strikes.

Wizz Air (WIZZ) re­ports its half year re­sults on 7 Novem­ber and EasyJet re­ports full year re­sults on 20 Novem­ber. (LMJ)

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