James Moore: Putting money in airlines is just a flight of fancy
Investment View: Despite the ongoing concerns about the economy easyJet's planes are still full
James Moore is the Independent's Associate Business Editor and writes the Outlook City comment column from Tuesday to Friday. He also has a keen interest in disability issues and when not attempting to further injure himself playing wheelchair basketball.
Friday 06 July 2012
Let's face it: the airline business hasn't been a terribly happy home for investors' money down the years. All that romance of flight malarky has tempted a fair number of people who really ought to have known better to part with their hard earned only to watch it disappearing down a deep, dark pit thanks to one of the industry's bouts of turbulence.
If there was ever really any romance, it's long gone now. The rise of the low-cost airline has seen to that. EasyJet, with its lurid, orange decor, and Ryanair, with all that blue and yellow and the impression it can give that the customer is an inconvenience: those two never pretended there was anything glamourous about their business.
Hook the punters with fares that promise a trip to somewhere sunny for less than a packet off Toffos, then squeeze them into a metal tube as tightly as they'll fit and squeeze their wallets at every opportunity.
Yesterday, the Office of Fair Trading, which has been looking at them with a jaundiced eye, gave them a slap, by ordering them to make admin charges for using debit/credit cards clear at the outset (rather than tacking a fat admin fee at the end of the booking process) and include it in the upfront fare.
At the same time, easyJet released some passenger numbers that suggested the above won't be the end of its world. The low-cost carrier reported passenger levels up 9.7 per cent to 5.43 million last month, compared with June 2011. It also revealed a 1.6 percentage point improvement in load factor, or the number of available seats sold, which rose to 89.9 per cent in June from 88.3 per cent last month. The rolling, 12-month passenger statistics to June are 7.5 per cent ahead of the previous year, at 57.36 million, while the load factor of 88.7 per cent is 1.6 percentage points better.
Despite the ongoing concerns over the economy – perhaps because of them – easyJet's planes are still full. Its shares have started to show that though. They're up by a third this year and now trade on 10.6 times forecast earnings for the year ending 30 September, while offering a prospective yield of just 2 per cent.
It is also worth noting that the company has been engaged in an ongoing battle with its biggest shareholder, founder Sir Stelios Haji-Ioannou, over issues such as buying new planes vs returning cash to shareholders, executive pay, and even chairman Sir Mike Rake's role at Barclays (Sir Stelios wants him fired).
Sir Stelios has a case on the first, he's right about the second (it is too high, and corporate governance watchdog Pirc has said so) and the same could be argued about the third (Sir Mike also chairs BT and has agreed to spend more time at Barclays so he's spread a little thin).
But his campaign, and his methods have gone down poorly in the City and could have a destabilising effect. If he wants his company back, he should really just bid.
At the same time fuel prices are an ever-present bugbear, and Douglas McNeill, an analyst at Charles Stanley, has argued that the market could be giving the company a bit too much credit for its move to attract business passengers. I'd take profits.
International Consolidated Airlines Group (British Airways and Iberia) appears to be in something of a hole. Spain, for a start, but the country's dire economy hasn't prevented some industrial unrest there (and remember how nasty the UK industrial dispute got). Meanwhile, chief executive Willie Walsh is currently spitting tacks about the UK's lack of aviation policy, and there's those fuel costs.
Strange to say there could be an opportunity long term. The acquisition of BMI should generate €100m (£79.8m) of operating profits by 2015, when €500m synergies from the merger of BA and Iberia are promised. New routes are being opened up, there is potential.
Potential yes, but we've been here before. If I wanted to take a punt I certainly wouldn't take it in this sector or with this company. With no earnings (this year) and no yield, it's a no no. Avoid.
Same for Flybe. The niche, low-cost regional airline has good control of costs, but it isn't making money and has been a disappointment in its first year since flotation. Avoid.
Which brings us to Ryanair. Its shares are even pricier than easyJet (12 times 2013 forecast earnings, but with a 3.3 per cent yield) and the odds seem against what is now its third bid for rival Aer Lingus.
All the same, its June passenger numbers were up 6 per cent, and the company has been a consistent, moneymaking machine. Michael O'Leary, its rambunctious chief executive, likes nothing better than to get up people's noses, and sometimes it seems as if the company is just being wilfully obnoxious.
But if there is anywhere in this most difficult of sectors to park your money (it pains me to say) it is with Ryanair. Hold.
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