Market Updates

2 min. reading time
5/24/2019

Budget airlines - a troubling sector?

ayondo Chief Trader on the budget airlines sector and its troubles

Budget airlines - a troubling sector?

Structurally the sector is hugely negative at the moment.  I would class EasyJet and Ryanair as the leaders in the budget airline sector and their share price performances from their earnings recently have been nothing short of disastrous. Fundamentally budget airline exist to fill a gap - historically, they removed the excess at which the national carriers operated at: in the process they have disrupted the sector and opened up airline travel at hugely cost effective prices. Yet therein lies the issue: when you operate at such tight margins, only a small event can hurt profitability.

On from that from all budget airlines have started what I class as ‘ghost’ costings - this is the where items classed as extra, which in reality should be part of the ticket, have been increased hugely in cost - whilst the headline cost of the flight remains visibly cheap. For example hand baggage, hold baggage and even seat allocation are now classed as extra even though most travellers need these items as part of their ticket. As cost savvy travellers then use price comparison websites they can now clearly see sometimes with all the added extra’s, the nation airline carries are no more expensive than the budget airlines. This leads to a fall in load factor - Ryanair operate at an astoundingly high 96%, whilst EasyJet 92% - both highly impressive (incidentally nation airline carriers normally operate around 80%)- yet a fall in this figure, hugely the affects the budget carriers profitability - as we saw recently with EasyJet’s earnings and ultimate press tax loss for the period of £275 million.

In addition to this, we also have the added pressure of one off magnitude events- these include Brexit and the subsequent costs to cross border flights & regulation and drone sightings and the cost to cancelled flights imposed by authorities due to safety concerns. The culmination of this makes for a troubling overall sector view and I’m finding it difficult to be positive at all.

This all make for a tumultuous period for Wizz shareholders- clearly its possible Wizz could buck the trend with its fore coming set of earnings - but in my view, budget airlines all operate in similar fashion so will likely see the same cost implications & issues as I’ve mentioned with EasyJet and Ryanair.  Another added problem on the horizon could be share price attacks from short sellers. This is where a hedge fund takes a significant short position in the airline by actively selling shares - in the process depressing the share price- whilst this is nothing new: due to various budget airlines going bust recently and the overall negative connotation to the sector in general at the moment this can lead to a disproportionate run lower of the share price- which is then very difficult for the company to fight against. In summary Caveat Emptor!

Jordan Hiscott,

ayondo Chief Trader


The above-mentioned market views and content reflect only the opinion of the author, not that of ayondo. This service is for informational purposes only and does not constitute advice or investment advice.

 

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