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Oil prices flying higher than their planes and a blocked carousel of other problems leave the airlines looking queasy
by Rachel Robson
Just when you thought it couldn’t get any worse for the airline sector, it has. The year so far has proved pretty miserable for airlines, and the recent collapse of Hong Kong’s budget carrier Oasis has only exemplified the problems the sector is facing as the rising oil price continues to pile on the pressure.
Of course, smaller start-up airlines offering lower fares, such as Oasis, are likely to be feeling the pinch from rising fuel costs to a greater extent than larger, more established airlines. ‘Younger airlines often don’t have hedging because it’s expensive,’ says Panmure Gordon analyst Gert Zonneveld. Business-class airline Silverjet, which floated in 2006, has also run into problems after speculation surrounding its financial situation was exacerbated in December following the collapse of rival Maxjet. Silverjet has now said it is in takeover talks, although potential suitors have not been disclosed. Lufthansa has been suggested, as have the Reuben Brothers, who loaned the airline £10 million in December. Earlier this year, Daniel Stewart analyst Mike Stoddart had predicted the airline was likely to fail, setting a target price of precisely 0p.
But it’s not only the smaller airlines that have got themselves into a pickle. Over recent weeks, the reputation of British Airways has pretty much collapsed following the debacle at Heathrow’s Terminal Five, which has since led to a delay in the airline’s transfer of long-haul services to the terminal. Faced with a significant rise in costs and the possibility of a pilot strike, there is now speculation as to whether chief executive Willie Walsh will even keep his job. The fiasco has prompted Morgan Stanley to slash its price target to 120p from 245p.
US carrier American Airlines was also recently forced to cancel more than 3,300 flights on the back of safety concerns. This, on top of profit warnings from both easyJet and Ryanair in the past few months due to rising fuel costs, highlights the mess the sector is in.
And it doesn’t look like things will get better any time soon. Zonneveld believes the problems will drag on for a while yet, although he adds that negative sentiment is not helping the issue. ‘The problem is that even when companies report decent numbers, people just say that they have yet to feel any impact,’ he says. But he points out that despite rising fuel costs, most airlines should still report profits, even if they are smaller than previously. Although he acknowledges that there may be further downgrades, he says there is no cause for panic. ‘Airlines such as easyJet and Ryanair still have long-term growth stories,’ he says.