Airline cycles, redux | FT Alphaville

Airline cycles, redux

We think this is proof that the vast majority of long-term airline investors are stupid irrational.

Goldman Sachs

That’s from Goldman Sachs, who on Monday issued a note on European airports and airlines.

The thrust of the research is that though passenger traffic appears to be stabilising, it is doing so at much lower level. Furthermore, passenger volumes are still weaker than airline capacity cuts, meaning load factors (the proportion of seats filled) are lower. Planes are taking off with fewer passengers onboard — a bad thing for an industry where, as above, capital comes to die and costs live forever.

Here’s the commentary from Goldman Sachs:

While we believe traffic will stabilise, we do not expect a significant bounce-back in passenger numbers in 2010. Unlike periods after market shocks (e.g. 2001), we believe the underlying erosion of demand means that growth will be slow to return and that traffic is likely to stay low for longer. Given the symbiotic relationship between airlines and airports, airports do not appear likely to recover until airlines do. However, even when GDP starts to recover, some key obstacles could remain. Factors such as rising unemployment and falling disposable income may take their toll on consumers, driving leisure travel lower. Furthermore, if fuel prices start to rise, this may also dampen demand. As they recover from the worst demand environment in their trading history, we believe that airlines will be slow to bring back growth.

Incidentally, Ryanair — one of the few carriers currently expanding — reported a full-year net profit of €105m this Tuesday morning– down from €480.9m last year. On a true net income basis, we should note, the airline posted a €169m loss. That figure includes a €222.5m writedown on the carrier’s mucho-unprofitable stake in Irish rival Aer Lingus and €51.6m of accelerated depreciation on aircraft. A bit of a mixed bag really.

However, Ryanair is still in something of a favourable position. With cash reserves of circa €2bn, the airline has pockets deep enough to withstand a downturn for a longer amount of time than its competitors — while driving many of them out of business. Indeed, the airline aims to double its after-tax profits for fiscal-year 2010 to something like €200m or €300m as it gains market share and benefits from lower fuel costs.

In contrast, it’s interesting to note the noises coming out of British Airways CEO Willie Walsh Tuesday morning. From the FT:

Willie Walsh, chief executive of British Airways, has warned the airline’s 41,000 staff that the group “is in a fight for survival”. …

He told the BA staff newspaper “the crisis facing our industry has never been more serious?…?There has been a significant shift in consumer attitude, with people wanting more and paying less. And things are getting worse. We haven’t yet reached the bottom, and everything points towards a protracted downturn.”

But as that first chart should remind us — even during the good times the vast majority of airlines aren’t necessarily great investments.

Related links:
Diverging strategies, airline edition — FT Alphaville
Aerospace mothballs – FT Alphaville