Hammered by the pandemic and despite facing inflationary pressures in the form of higher staffing costs and fuel bills, airlines are not only staying in business but even raising guidance as robust demand for flights allows them to push up air fares.
Yet risks to earnings are significant as the incoming global recession will make companies and consumers think twice about spending on travel and could knock the industry’s demand recovery off course.
WHAT ARE OVERSEAS CARRIERS SAYING?
This week, shares in Australian flag carrier Qantas (QAN:ASX) soared after the airline nicknamed the ‘Flying Kangaroo’ reported bumper demand for flights and guided towards a return to profit, in part fuelled by higher flight prices, following three years of Covid-induced losses.
And across the pond, American Airlines (AAL:NASDAQ) and United Airlines (UAL:NASDAQ) are enjoying the strongest consumer demand in three years.
Texas-based American Airlines raised its third quarter revenue outlook after a strong summer and higher ticket prices helped it offset elevated operating costs in the three months to September, while Chicago-headquartered rival United Airlines is lining up another increase in trans-atlantic flights in the hope consumers will continue to spend on overseas trips they’d put off during the pandemic.
BUT WHAT ABOUT EASYJET?
However, rising interest rates around the world, designed by central banks to cool inflation by dampening demand, threaten the industry’s pricing power and post-Covid recovery.
This is why shares in International Consolidated Airlines (IAG), EasyJet (EZJ) and Ryanair (RYAAY:NASDAQ) are down 36%, 53% and 47% respectively year-to-date.
The market is pricing in tough times ahead for the aviation sector and in terms of the names with exposure to UK consumers, discounting the impact of the weak pound and the high costs of jetting abroad, which could lead to more consumers pursuing staycations.
EasyJet’s warning of a third consecutive annual loss and the news it won’t pay a dividend for the year to September 2022 was greeted with a shrug by the knowing market, with the shares down just 1% to 282.5p.
The budget airline expects full year 2022 losses to come in at between £170 million and £190 million, a deficit which includes a currency-related hit as well as the impact of the omicron variant, the Ukraine war and ‘the industry wide issues experienced this summer’.
2022 should have been the year the airlines really bounced back as pent-up demand from holidaymakers was unleashed. Unfortunately, airlines, airports and other infrastructure proved not to be up to the task of dealing with a flood of returning passengers.
CAN EASYJET SURVIVE THE CRISIS?
CEO Johan Lundgren appears confident the answer is yes. He said EasyJet’s summer 2023 season went on sale last week and ‘we were filling the equivalent of more than four A320 aircraft a minute in the opening hours demonstrating the continued demand’.
Lundgren also stressed EasyJet is ‘Europe’s largest operator at primary airports with one of the strongest balance sheets in the aviation industry. We face the uncertain macro-economic environment with many strengths through our brand, network and business model which enable us to provide low fares to millions despite the rising cost of living.’
Russ Mould, investment director at AJ Bell, said: ‘Looking forward, investors will take some comfort from commentary on resilient bookings for this winter and next summer.’
This suggests that ‘even with limited discretionary spend, people are still prioritising jetting away. This may be the case for now but, particularly in the UK, pressures from rising mortgage costs and energy bills are only mounting and people may eventually become stretched beyond their limit, even when it comes to booking with a low-cost carrier like EasyJet.
‘At least a recent improvement in cancellation levels means EasyJet should not sustain further damage to its brand and reputation from messing customers around.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) owns shares in AJ Bell.
