Airline sector still in the danger zone as cost and operational pressures intensify
Shares in the airline sector have been poor performers this year
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)