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IAG shares recover but more trouble ahead for Ryanair and easyJet

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Shares in airline companies are recovering this morning but this might be just a brief respite before we see more troubles ahead.

The French civil servants are at loggerheads with the Macron government over their planned reforms which would, among other things, delay their retirement age. In a rare show of unity, all civil servants unions took to the barricades in May, including three air traffic control unions, crippling traffic across the French skies.

The bigger issue remains far from resolved and there is talk of further walkouts during the busiest traffic months of June, July and August. This will not only close swathes of the French air space causing outright cancellations but will also affect other routes through much higher costs in terms of the extra fuel needed to fly around the country.

Ryanair said on Tuesday it had to cancel around 1,100 flights in May – compared with only 43 in May last year – and the shares were punished with an immediate fall. British Airways parent International Consolidated Airlines and easyJet shares also dropped on Tuesday but by Wednesday morning were in slightly better shape with IAG trading up 1.71% up at 691.80, and easyJet at 1,734.50, unchanged on the previous close. Ryanair continued to decline as was down 0.15 at €16.68.

The strikes are coming at a time when airlines are already under pressure as rising oil prices are already taking away a significant chunk of their expected profit this year. On the upside, Saudi Arabia and Russia are talking about increasing oil production shortly and this is beginning to put a cap on oil prices.

Budget carriers already operate on such a thin a margin that even small changes to their revenues can have a pronounced effect, demonstrated aptly last year when budget airline Monarch went bankrupt overnight because the weakening of the pound slashed its profits. EasyJet, Ryanair and the IAG-owned Iberia, Air Lingus and Vueling are all facing more pressure throughout the year.

However, looking at Ryanair’s latest passenger traffic figures the company may have some leeway to handle a crisis. Its passenger numbers increased 6% last month to 12.5 million and its load factor – a measure of how well the airline fill its  planes – improved to 96%, up by 1% from 2017.

Also, last year the company managed to pull the proverbial rabbit out of the hat by increasing full year profits by 10% to €1.45 billion despite having to cancel a large number of flights in September 2017 due to mismanaged pilots’ annual leave. It remains to be seen if the company’s chief executive manages to continue the fine balancing act of rising passenger numbers while handling the effect of strikes and higher oil prices.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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