Friday, February 23, 2018

Airlines Are Booming, So Why Are Investors Worried? Investors worry that expansion plans and rising costs are threatening profit

The Wall Street Journal
By Robert Wall
Updated February 23, 2018 7:57 a.m. ET

Global airlines are cruising through one of the industry’s big booms, but investors are already growing worried they may end up squandering it.

British Airways parent International Consolidated Airlines Group SA reported Friday record net profit, joining a host of global airlines, including United Continental Holdings Inc. and American Airlines Group Inc., enjoying strong earnings amid greater-than-expected passenger growth.

But IAG, which operates BA, Ireland’s Aer Lingus and Spanish carriers Iberia and Vueling, also said it would increase capacity, a measure of seats sold over distance flown. The expansion, 6.7% this year, was ahead of the company’s midterm target and caught investors by surprise.

IAG shares were down almost 5% in midday trading in London, as shareholders worried that the expansion plans could cut into profit.

The drop follows similar shareholder angst in the U.S. United Continental, the No. 3 U.S. airline, spooked investors last month when it announced greater-than-anticipated expansion plans, sending shares down 11% on the day and dragging down other airline stocks. Airline shares slid further when American Airlines and Southwest Airlines Co. last month signaled that costs were rising.

“Airlines have gone out of fashion, with weakening capacity discipline in the U.S. domestic market and the fuel price rallying,” HSBC said this week.

The turbulence is hitting airlines after a period in which a combination of factors have helped lift the industry—one that is been particularly vulnerable to boom-bust cycles.

In recent quarters, carriers in the U.S. and Europe, the two largest contributors to collective industry profit last year, have delivered bumper earnings through a combination of low fuel prices, control of costs, and restrained growth. As passengers started taking to the skies in record numbers, big airlines have been able to raise ticket prices, lifting shares.

The bull market has affected the larger air-transport industry. Boeing Co. and Airbus SE are cranking out jetliners at an unprecedented pace to satisfy airlines clamoring for planes. Banks and private investors have flooded the market for plane financing.

But airline investors have turned skittish more recently, fretting about rising fuel prices, excessive expansion plans, and creeping costs.

IAG Chief Executive Willie Walsh insisted passenger unit revenue will grow despite the boost in seats-for-sale and that the company would deliver “accretive sensible growth.” British Airways, IAG’s biggest profit contributor, would only expand around 3% this year, he said.

Operating profit should rise again this year to a record, Mr. Walsh said, underpinned by the improvement in passenger unit revenue and currency-adjusted nonfuel unit costs. To signal its confidence, IAG also announced a €500 million ($615 million) share buyback.

Air France-KLM last week reported record operating earnings, though the net result was dented by pension charges. The airline also disclosed plans to lift capacity. Shares tumbled 6.4% on the day.

Rising fuel costs are a growing concern. IAG expects its fuel expenses this year to rise by €500 million to around €5.1 billion, compared with 2017. “We are worried about fuel prices,” IAG Chief Financial Officer Enrique Dupuy said Friday. Air France-KLM said its fuel bill would also be higher in 2018.

Shares in Southwest Airlines, the No. 1 U.S. budget carrier, are down 12.4% this year. Air France-KLM shares have tumbled more than 25%, and Deutsche Lufthansa AG, which reports 2017 earnings next month, is down more than 10%.

Original article can be found here ➤

1 comment:

  1. I fly Southwest. If Southwest doesn't fly there I don't go there.