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Your Money > Investing Comment Articles > Hopefully not Terminal
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By Richard Hunter, Hargreaves Lansdown
He warned that the "perfect storm" was brewing in Europe, made up of the combination of "higher oil prices, poor consumer demand, weaker sterling and higher costs". Indeed, these higher oil prices were commented upon by the team at British Airways, who said last week that the 16% increase in fuel costs over the third quarter was probably the highest quarterly increase management had known. The effective profits warning from Ryanair knocked some 11% from its share price on the day, which cumulatively has resulted in a dip of some 34% over the last year. Not that its rivals have fared much better in the same period - British Airways' price has fallen 42% and EasyJet 29%. The long-term future of airlines has long had its doubters. Quite apart from the pressures imposed on margins by the arrival of the no-frills airlines, the industry has had to deal with Gulf Wars, the Sars virus, terrorist attacks, bird flu, the general threat of a global recession, high oil prices and, beginning in 2006, the UK Office of Fair Trading and US Department of Justice investigation over alleged cartel activity in the pricing of passenger tickets. There may be arguments for less business travel in future if videoconferencing and the like ever really take hold, but a "virtual" holiday seems rather less of a possibility. Nonetheless, in the event of a US (let alone global) recession taking hold, this would undoubtedly impact on the higher margin end of the market to which, for example, British Airways is particularly exposed. And yet, on the whole, the market remains favourably disposed towards the shares, with the general consensus currently standing with Ryanair and EasyJet being strong buys, and British Airways a buy. Why should this be? The industry itself (not to mention the airport operators such as BAA) are all confident that passenger numbers are likely to double by 2020, not only because the major destinations are increasing the capacity of their main airports, but also because of the growing trend of accepting that popping down to the global village is no longer something which is confined to the fortunate few. This, in turn, could lead to some consolidation in the industry beyond some of the joint service arrangements which continue to be put in place, for example British Airways/Qantas. In addition, the use of hedging against unfavourable future movements in energy prices has been used to good effect at times over recent years, whilst the like of British Airways have undergone a strict cost control regime which has automatically helped to improve profit margins. The imminent opening of Terminal 5 at Heathrow, whilst providing additional competition through the Open Skies agreement will also provide opportunities and the ability for airlines to be able to improve baggage performance and punctuality to levels not previously seen, much to the relief of regular travellers. Clearly, at the present time, the airlines are undergoing a period of difficulty which will almost certainly cloud near-term visibility. In addition, ongoing geopolitical tensions could continue to have both a direct (number of people travelling) and indirect (for example higher oil prices) impact on their businesses. There will, however, always be a higher element of risk inherent in investing in airlines. Quite apart from any operational or financial difficulties which loom ahead, there are a number of factors outside the industry's direct control which will threaten to undermine future growth. Useful links: |
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