After a summer of strikes, air traffic control restrictions, a higher oil price and a weak pound making holiday spending more expensive, investing in an airline might not seem like an obvious choice.
And recently many smaller European airlines have failed, yet today easyJet announced profits have soared 41% over the last 12 months. How did that happen?
It’s been a turbulent year for the airline industry. Back in June the International Air Transport Association (IATA) warned profits at the world’s major airlines would be slashed due to rising fuel and labour costs.
The IATA cut its 2018 profit forecast for the industry by 12% to $33.8bn (£25.3bn). This is despite a projected increase of 6.5% in passenger traffic and record industry profits of $38bn last year.
Last week, UK regional low-cost carrier Flybe put itself up for sale after another disappointing set of results. Compensation costs for disruptions as well as higher oil prices have also led to the failure of several smaller European airlines recently, including Cyprus’s Cobalt, Latvia’s Primera Air, Germany’s Small Planet and Belgium’s VLM. That’s in addition to Monarch, Air Berlin and Alitalia closing in 2017.
However easyJet has bucked the trend, flying a record number of passengers, up 10.2% from last year with plans to increase capacity by around 10% for the 2019 financial year. A cost and efficiency programme which saved the company £107 million has definitely helped, alongside the collapse of rival airlines and a “solid hedging position” for mitigating the effect of a rising oil price.
Like flying, investing in airlines is not to everyone’s liking. Once a luxurious, pastime of the wealthy, flying has become increasingly more ordinary with budget airlines such as easyJet and Ryanair slashing fares on short haul routes, while new low-cost entrants such as Norwegian and Air Asia X have set their sights on disrupting long haul routes and the business traveller market. In response airlines have been forced to continually cut their profit margins (as well as their leg room).
When investing in airlines it’s worth remembering that however good the customer service, safety record or brand loyalty of the carrier, two factors will always affect profitability - fuel and labour costs. If both of these rise at the same time, profits can erode very quickly.
Airline stocks are also highly sensitive to macroeconomic news which makes them vulnerable to an economic downturn. In a recession, leisure travellers take fewer holidays and businesses cut back on their travel expenses which all affects the bottom line.
And let’s not forget the uncertainty of Brexit. Fears of long delays at border controls and less holiday money in your pocket due to a weak pound, could put off some holidaymakers from venturing abroad post Brexit.
However easyJet confirmed today that “forward bookings are solid”, with 50% of seats sold for the first half of 2019, in line with the prior year. Maybe travellers aren’t so put off by the uncertainty of how we leave the EU in March?
In the case of easyJet, for now at least, it’s an example of how a company can rise up against its rivals and deliver returns for its investors, despite challenging external pressures. As a result, the company is proposing to reward its investors with a 43% increase in its dividend.
As ever, for investors, choosing the winners and avoiding the losers is paramount, whatever the industry.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.