Low-cost airlines got a boost from last week’s Budget with increased air passenger duty only set to hit the upper end of air travel from April 2019.
At the same time the duty will be frozen for economy passengers and short-haul flights. Add in the collapse of a competitor in Monarch, and the question is whether the outlook for airlines is starting to soar above the turbulence, and if so, which one will be the biggest winner?
Ryanair’s recent suspension of 34 flight routes, affecting almost 400,000 passengers, generated plenty of negative press, with the firm blaming it on a ‘mess-up’ in how it schedules time off for pilots.
‘The recent tribulations of Ryanair, Europe’s largest budget airline, have been gleefully seized upon by the British press, ever keen to knock any business or individual that has dared to be successful,’ said SVM’s Neil Veitch.
‘Customers didn’t necessarily love Ryanair itself, but they certainly did love the opportunities it offered. This remains the case and is the core reason we believe that demand will prove resilient, despite recent news flow.’
Citywire + rated Veitch points out Ryanair is trading on an estimated March 2018 price to earnings ratio (PE) of c13x and he believes the concerns over Ryanair’s future are ‘misplaced’.
‘While there may be some short-term turbulence, this is an attractive valuation for a company that is still growing fast, has a rock-solid balance sheet and which will continue returning cash to shareholders.’
Ryanair’s half-year results showed an 11% rise in profit to €1.3 billion (£1.1 billion) in the six months to 30 September. However, the disruption caused by the cancellations saw profits fall 2% profit to €895 million year-on-year in the last quarter.
‘Ryanair isn’t blinking though, and has maintained its profit forecast for the year,’ said Laith Khalaf, senior analyst at Hargreaves Lansdown.
‘It’s too early to tell whether there will be any lasting effect from the flight cancellations announced in September, though providing Ryanair can keep operational problems from arising again, it seems unlikely reputational damage will be an issue.’
EasyJet’s trading update covering the key months of July, August and September revealed the group carried a record 24 million passengers over the peak holiday period.
However, despite the demise of Alitalia, Air Berlin and Monarch, this good news was offset by EasyJet saying it still expects market capacity growth to be a headwind, its shares dipping slightly on the news.
EasyJet’s full-year results last week were largely in line with expectations with pre-tax profits down 17.3% on higher costs and investment in the business.
However, Khalaf’s colleague and equity analyst George Salmon noted the last set of results included a more positive outlook with shares rising 4.6% on the day.
EasyJet is expected to see low to mid-single digit growth in underlying revenue per seat in the first quarter and forward bookings for 2018 are ahead of last year at 88% for Q1 and 26% for Q2.
‘EasyJet’s top line may look healthy, with revenues up 8% to £5 billion, but this increase has come from the addition of 6.8 million extra seats and 59 more routes over the year,’ said Salmon.
‘Due to the intense competition in the sector, EasyJet’s average ticket price was around 8% lower than last year. Together with higher running costs and unfavourable exchange movements, this has seen profits squeezed.’
Jeremy Cook, chief economist at World First, highlights there is yet another headwind that investors in both airlines need to factor in and that is Brexit.
Beyond the simple slowing in consumer spending and the weakening of sterling there is a greater worry around flight access in post-Brexit Europe.
Currently, Cook explained there is a single market for aviation as part of the European Common Aviation Area arrangements, which since 1997 has allowed EU members’ airlines to travel anywhere.
‘Brexit takes EasyJet and others out of this arrangement,’ he said.
‘The aviation market is a market that is not being talked about widely in Brexit negotiations, yet but could easily be one of the largest sectors that goes over a cliff edge on 29 March 2019.’
He highlighted a bilateral agreement could be an option, however, this approach is likely to be time-consuming, and negotiations may stall over carbon and emissions trading, security and ground slot allocation.
‘Without a transitional deal, the sector will have to hope that material changes are made quickly so as to prevent a complete lock up of air travel from the UK.’