The Week Ahead: Rising fuel costs unlikely to clip easyJet's wings

Click to follow
The Independent Online

Resurgent oil prices have turned the spotlight on the aviation sector, which must struggle with higher costs while a prolonged economic slowdown is on the horizon. But, despite mounting concern for the sector, analysts think easyJet, the no-frills airline which is due to publish its half-year results

tomorrow, may emerge "larger and stronger" from the downturn.

Thanks to its low cost base, high profit margins and strong balance sheet, easyJet stands to gain market share and pricing power as its weaker, less profitable rivals are forced to cut capacity and raise fares to offset higher fuel prices, according to Credit Suisse.

"Several US airlines have announced reductions in capacity and some have filed for bankruptcy. We are starting to see the first signs of similar trends in Europe," the broker said, citing the recent decision by Scandinavian Airlines to reduce its aircraft fleet by 12 and cut its capacity growth forecast for 2008 to zero.

Citigroup, while noting the risk posed by current fuel prices, also expressed its confidence in easyJet. In a recent note to investors about European airlines, the broker chose the Luton-based carrier as one of its top picks for long-term value investments, and its analysts maintain a "buy" rating on the stock.

Today: Lloyds TSB is due to publish an interim management statement and, in light of recent rights issues by HBOS and Royal Bank of Scotland, the market is likely to focus on the bank's capital strength.

Alex Potter, an analyst at Collins Stewart, said in a recent note that although Lloyds TSB's stock had been a strong relative performer on the basis of a strong capital base and a good funding position, the bank "would be keenly exposed" to a UK recession and thus "a capital raise, whilst not explicitly necessary, cannot be ruled out".

Mr Potter added: "Lloyds grew its property and construction lending book by 34 per cent in 2007 (the highest of the UK majors). It is the most domestic-focused of the UK majors (virtually all of profits) and, with other banks doing rights issues as I write, no longer so explicitly well capitalised."

Results/updates: Aberdeen Asset Management, Addax Petroleum Corporation, Millennium & Copthorne, Randgold Resources and Lloyds TSB.

Tomorrow: The market is not expecting any ugly surprises from Standard Chartered, which is due to publish an interim management statement. As Collins Stewart points out, the company "has one of the strongest funding and capital positions amongst the European banks and this alone will continue to underpin its strong performance. Strong macro factors continue to underpin its revenue streams and it has mostly avoided the credit crunch – this is a valuable proposition."

Results/updates: British American Tobacco, Intercontinental Hotels, Cobham, Rank, easyJet and Standard Chartered.

Thursday: The drinks giant Diageo will publish a trading update covering the three months to March 2008. Citigroup anticipates news of organic net sales growth of about 6 per cent. More importantly, Diageo is expected to reiterate its expectation for 2008 of nine per cent growth organic earnings before interest and tax.

Citigroup said: "This resilience, despite deteriorating macro-economic conditions, reflects the evidence – for example from Pernod Ricard – that emerging market demand remains strong, while both NABCA and AC Nielsen data indicate relatively robust trading in the US."

Meanwhile, the business software specialist Sage is due to publish its interim results. Panmure Gordon reckons that any weakness in Sage's US operations will be offset by strengths at its European division, which accounts for 30 per cent of group earnings before interest, tax and amortisation.

"In our view, in the wake of the appointment of new US CEO Sue Swenson, the US is [a] work in progress," the broker said in a preview note. For the first half, Panmure anticipates group sales to climb from £574.7m to £608.4m and EBITA to rise to £144.4m from £138.6m.

Results/updates:Unilever, International Power, Next, Old Mutual, Signet, Diageo and Sage.

Friday: HMV, the music, video and entertainment retail group behind the Waterstone's bookshop chain, is due to publish a pre-close trading update. Brokers at HSBC are hoping for a "punchy" presentation, saying in a preview note: "We expect HMV to announce an upbeat [update] with good growth in games and DVDs, reasonable performance in books and a moderating decline in music.

"The recent disclosure of the terms by which Sir Richard Branson offloaded the Virgin retail chain (now renamed Zavvi) increases our conviction that HMV's major UK competitor is likely to diminish as a threat – possibly to zero – over the next five years."

Despite the positive assessment, HSBC was wary of the likely share price reaction, adding: "HMV has long been one of the most shorted stocks in the sector. Currently 37 per cent of the stock is on loan," the broker said, noting that there could be an exaggerated share price response to any positive news flow.

Results/updates: Smurfit Kappa and HMV.

Comments