A Perfect Storm for Airlines

By Anonymous

European airlines are bracing themselves for a stormy winter. But stocks are cheap enough that investors prepared to look further out may not have to brace too.

Ryanair RYAAY -15.73% stock fell more than 13% Monday after Europe’s largest budget carrier said profits for its fiscal year through March would likely be 12% lower than it previously expected. A string of strikes across many of its European bases has hit bookings and added to costs.

Ryanair has been particularly affected by strikes because it has only just started to recognize unions, but the issues have also touched other companies like Air France-KLM . The underlying problem is a shortage of staff, particularly pilots, after years of expansion by airlines.

Oil prices have also risen above $83 a barrel. EasyJet , another big budget carrier, said Friday its fuel costs would be as much as £105 million ($136.8 million) higher for the year through September 2019.

While costs are escalating, airfares are under pressure. Optimism in late 2017 and early 2018 prompted European airlines, particularly budget carriers, to accelerate their expansion plans. Now economic momentum across the continent is at its weakest in two years, according to surveys of purchasing managers published Monday. Supply of airline seats has probably raced ahead of demand, making it hard for airlines to pass higher fuel and strike costs onto passengers.

A Perfect Storm for Airlines

European airlines are bracing themselves for a stormy winter. Photo: Julian Stratenschulte/Zuma Press

Brexit negotiations also seem likely to get noisier as the March deadline for a deal approaches.

However, none of these issues is new. Stocks have been falling all summer, and the sector is now at its cheapest since 2008, comparing enterprise value to prospective operating profits.

There’s no sign yet of Europe falling into recession. If political jitters ease, everything could suddenly look much rosier in the spring. Carriers also seem likely to tighten supply, bolstering prices. Investors may enjoy a less turbulent ride next year.

Write to Jon Sindreu at [email protected]