Terrorism, higher oil prices, and stiff competition from both regional and international players are now the fundamental drivers in this industry.
In terms of performance, airlines are penalised heavily when world growth slows and during international crisis, while benefiting considerably from upturns in the economy. As such, in financial terms we relate the airlines industry as being very cyclical and a high beta investment. So what is beta? In simple terms it is the sensitivity of a financial instrument (bond, equity, etc) in relation to the market or to an alternative benchmark. For example if the beta of our world airlines industry is 1.15 this means that the sectors excess return is expected to move 1.15 times the market excess returns. (if the market excess return is 10%, then we expect, on average, the airlines sectors return to be 15%)
Source: FactSet Estimates
Among the global players, US airlines are struggling, European Airlines are holding and Asian/Middle East airlines are growing; particularly in the middle east with massive investment programmes. So what’s the story back home? European airlines have weathered the storm in both 2004 and 2005 with effective restructuring programmes and impressive growth rates. Analysts however are now less confident that European Airlines can stand against the strains of higher fuel costs and escalating international competition.
Outlook
In the short-term, play the passenger traffic game. Financially stable regional players taking on the big boys on the long hauls are a good bet. This is the most profitable and lucrative market. In the bigger scheme of things it might be useful re-thinking positions in the airlines sector and tilt towards a defensive bias. Europe still remains the better investment opportunity; however stock picking has again become the flavour of the year.
These views are independent of FactSet Europe Ltd and are proprietary to Bobby Rakhit. For the full report and individual sector reviews and recommendations please contact rakhitreport@yahoo.co.uk.