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By Richard Hunter
On the other hand, the industry itself (not to mention the airports such as BAA, now owned by Ferrovial of Spain) 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 touring the global village is no longer something which is confined to the fortunate few. Nevertheless, the current conditions are extremely challenging, leading the British Airways CEO to recently comment at the time of the BA Interim Management Report that "The six month period will be remembered as one of the bleakest on record." This is due to any number of factors. Even the fall in the oil price, which is clearly of benefit to the airlines, has been mitigated by the strength of the dollar (in which oil is quoted), especially for the European companies. The well reported credit squeeze has meant fewer funds available for future investment, and even where available, this is at a higher price. The general malaise of global unemployment - such as has been seen in the financial sector, for example - has reduced the amount of business travel. This has resulted in the demise of a whole clutch of smaller airlines, whilst for those remaining consolidation is increasingly the order of the day. The recently announced acquisition of BMI by Lufthansa of Germany can be added to the massive takeover of Northwest Airlines by Delta Air Lines in the US. BA had also been in discussion with Iberia of Spain, although since the market has taken a turn for the worse this particular conversation could be in jeopardy. Then there is the scaling back of capacity. According to a recent FT article, a survey by Ascend (an aviation consultancy) concluded that some 5% of the global fleet has been grounded in the last five months alone. In the UK, the expansion of Heathrow has been thrown into doubt due to the wider economic slowdown and lack of demand. Inevitably this backdrop has been reflected both in share price performance and the current consensus market view towards the UK airlines - British Airways' shares have fallen 56% over the last year (weak hold), Ryanair are down 42% (hold) and easyJet are off 51% (sell). Are there any chinks of light at all for the industry? The longer term picture as mentioned above could provide some solace. It is also fair to say that during its history the industry has had a tendency to show natural resilience, and has navigated many crises. Meanwhile, although in the minority, there are a handful of analysts who are sticking their necks out in buying these shares with one commenting that "the time to buy airlines is when sentiment is wretched". British Airways, for example, is still in the process of implementing a strict cost cutting regime, whilst its strategy remains skewed towards the upper end ("premium cabin") end of the market. Meanwhile, as an aside and as noted by the hotel chain Travelodge the other day, the fact that the budget airlines have managed to keep fares low even in these difficult economic times has tended to lead to much stronger customer loyalty. Overall, there will inevitably be more turbulence ahead. More cautious investors will appreciate that the long-term story may well remain intact, but for the moment there are a host of investment opportunities which carry much less of a risk in the shorter term elsewhere. Richard J Hunter is Head of UK Equities at Hargreaves Lansdown Stockbrokers Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The long term future of the airlines has long had its detractors. 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, the Bird Flu virus, the general threat of a global recession, record breaking oil prices and lately the spectre of a potential global recession.