Airline stock prices may have been on something of an upward trend over the past few months, but Europe's low-cost carriers have not been among the beneficiaries, points out Chris Tarry of CTAIRA.
As noted in this column a couple of months ago, airline stock prices have been on the rise of late, surprisingly so given the apparent lack of any hard evidence of an upturn in the travel market. Time then, to take a closer look at those share price movements and in particular some interesting recent wobbles for Europe's previously unassailable low-cost sector.
The analysis centres on a look at the highs and lows of the share price over the past 12 months for a selection of the big name stocks in the USAand Europe - Asia-Pacific has been excluded given the roller-coaster of SARS.
There has clearly been something of a recovery from the lowest points and some of the majors are now trading at, or close to, their highest levels for a year. For example, by early August, stocks in both British Airways and Air France were trading at almost a 12-month high and at more than twice their lowest level. In the USA, some of the turnarounds have been even more dramatic, with American Airlines parent AMR trading at nearly an eightfold premium on the low that the group hit as it sailed close to bankruptcy.
The warning still applies, as it did back in July, that there may be a rendezvous with reality still to come. Although mainline carriers have seen traffic pick up, they should avoid the perils of "volume illusion" and stay with the task of a structural reduction in costs.
Perhaps more interesting is the low-cost segment, where there seems to be a divergence across the Atlantic. The US airlines in this sector are trading close to their 12-month highs, yet in Europe, both Ryanair and easyJet were at only 61%of their highest point. For both, the highs had been reached somewhere around the final quarter of 2002 and have since declined.
Most other airline share prices in our selection reached a low point in March 2003, as the Iraq war loomed, and then started to climb. But easyJet's low did not arrive until June and although it has bounced back by just over 50% from this point, it is still some 40% below the peak. The real damage came in May as it released disappointing results for its financial first half to March.
The more important question, however, is what might happen next? The airline's next set of financial figures are not out until mid-November but the monthly traffic figures have already shown a marked slow down in the rate of traffic growth. The 9.4% reported for July is relatively modest by comparison with other members of the low-cost club. JetBlue's traffic in July grew 79% and Ryanair's 40%, although its yields have been under attack, falling 14% in the June quarter.
Most airlines would be delighted with traffic growth at close to double digits, but this rate is somewhat pedestrian for a low-cost contender, especially one with plans to take on 120 new Airbus aircraft, of which 86 are for growth. This also clearly has implications for Airbus, for whom the easyJet order accounts for at least 10% of planned output over each of the next few years.
A circular, put out by easyJet at the time of the order, noted that it could adjust the delivery schedule if necessary, and it may have to do so if growth does not pick up. On a rough calculation, the original delivery scheduled implied an annual growth rate of some 21% - well ahead of the July rate.
More important is the effect that lower growth could have on the share price. Although it is prudent to protect yields and load factors as easyJet wisely seems intent on doing, the share market would surely be disappointed if less than 10% became the prevailing rate of traffic growth. Stock markets are unforgiving in the face of disappointment.
EasyJet has clearly had a dramatic effect on intra-European air travel, acting as a catalyst for fundamental change in fare structures. However, as things now stand, there is a very real prospect that the original business model will have to be reworked. But unless this results in a substan-tially higher rate of growth, the "go-go" stock market rating easyJet once enjoyed may have to give way to something less racy.
Source: Airline Business
