Recent airline share price rises do not tell the full story, writes Chris Tarry. Analysis from Antonio Panariello of Flight Insight
It is said that every picture tells a story, but the reality is it only shows what has happened and not what might happen. Although there have been marked geographical differences, the recovery in airline share prices that occurred over the weeks leading up to mid-August might be interpreted as meaning the future will be markedly better. But unkind observers of the stock market suggest that buy recommendations on shares may amount to little more than the peddling of dreams, and the problem comes when reality kicks in.
There should be little doubt that the global economic background is likely to worsen and that this will be reflected on the demand side for airlines. Despite the actions taken by a number of US airlines, there is still a very long way to go before the industry has adjusted to the new environment and even longer before it is able to generate adequate returns.
The recent falls in the oil and fuel price since the peak reached in late June and early July, from some $140 a barrel for oil to closer to $110 as of mid-August, are clearly welcome. However, despite this fall, the jet fuel price is still some 80% higher than it was a year ago. Unsurprisingly the share prices of many but not all airlines have staged a significant recovery. There are other factors at work than just the fall in the price of fuel - not least the expectation that the long talked of consolidation process will deliver benefit - but this still has to be proven.
In Europe and the US there have been some remarkable share price performances since the July low points. Shares in British Airways, Air France-KLM and easyJet are all up by 40-50%, while shares in Ryanair (after its August profit warning) are up by a third but are still some 10% lower than their July peak. In the US, American and Continental Airlines in mid-August were trading at prices three times the level they were in July. However, in Asia there is a different picture while Qantas might have recovered by some 20% from its recent lows, both Cathay Pacific and Singapore Airlines are just 11% up. AirAsia's share price has increased by almost 50% from its June low, but it is trading at a little over half the 12-month high.
A real concern now as we move towards the final quarter of 2008 is what 2009 will look like. Even at the most superficial level the conclusion is that it will be worse than 2008. There is a widening economic malaise, whether most evident through slowing rates of growth, declining GDP, the increasing onset of inflation - or in many regions a combination of all three. The economic "mood music" continues to deteriorate, and this will have an impact on the demand for air travel and what customers are prepared to pay.
Further adjustment of capacity is inevitable. In the near-term expect the number of new aircraft available to increase, in addition to the stock of used aircraft that have been returned to lessors - either because they were due to be returned or as a result of airline failures. Expect some acceleration of this as we move through the winter 2008/09 season. Without new sources of demand to pad the cycle and increased manufacturer finance, the only consequence in the 150-seat aircraft segment is a reduction in production rates.
In essence, 2008 will be seen as the year of realisation - although this reality appears to have dawned more quickly in some segments than others - while 2009 will be the year in which the reality translates into an even more difficult environment.
However, what are clearly challenges for most will no doubt be opportunities for some, and it is perhaps inevitable that the industry will emerge in a different size and shape. Only time will tell, of course.
Source: Airline Business
