EU airlines find faint sunshine in global storm

International Consolidated Airlines

Tue 09:06

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Oliver Taslic
LONDON, Nov 10 (Reuters Breakingviews) - “Control the controllable” is a well-worn maxim, but one taken to heart by European airlines. Last week the likes of Air France-KLM AIRF.PA and Deutsche Lufthansa LHAG.DE showcased positive momentum on fares, non-fuel costs and the balance between supply and demand of seats into winter and next year. But the unpredictability of the Iran war and AI-driven stock markets will make it difficult for shares to properly take off.
Four of Europe’s “big six” airlines – British Airways owner IAG ICAG.L, Ryanair RYA.I, Air France-KLM and Lufthansa – last week reported earnings for the September quarter, which captures the crucial summer season. All saw their shares rise on the day of results. Granted, falling energy costs in the wake of the Democrat sweep of the US midterms helped, with investors betting Iran escalation has become more politically difficult. Brent crude prices tumbled over 16% last week, while European jet fuel fell over 8%. Brent was down another 6% on Monday.
Cheaper fuel is only part of the story, though. Intra-European fares are finally rising, market leader Ryanair reported, following a summer where high growth in seats and nervy consumers unhelpfully pushed prices down, despite the jet fuel crisis. Demand for Gulf-avoiding routes between Europe and Asia remains strong, particularly from corporate customers, while the transatlantic boom – which largely involves ferrying rich Americans to Europe – is showing no signs of slowing. IAG reported “passenger revenue per available seat-kilometre” up 11% year-on-year on North Atlantic routes. At Air France-KLM, quarterly operating profit of €1.3 billion beat last year’s haul, lifting shares 12% last Thursday.
The problem is visibility is poor – even by airline standards. Take stock markets. Fears over a slowdown in AI data centre buildouts helped push the Nasdaq 100 Index .NDX down 6% on Thursday, wiping out over $2 trillion in market value. Though shares have recovered somewhat, a significant correction could dent the crucial “wealth effect” – fliers who feel richer because their stock portfolios are up are more inclined to splurge on high-margin premium airline seats. Energy costs could spike again if US President Donald Trump decides to escalate the Iran war, while both Ryanair and Lufthansa reported shorter booking windows, with customers apparently hesitant to book too far ahead. Finally, fuel hedges agreed at pre-war rates are rolling off, while a wave of bomb threats last week disrupted operations.
The risks are visible in valuations. Take IAG. Analyst forecasts compiled by Visible Alpha suggest the group will generate operating profit of €5.4 billion in 2028, by which point fuel may have normalised. IAG’s enterprise value is just 5 times that figure. Its much lower-margin rival Lufthansa, which has more exposure to non-passenger businesses like maintenance and cargo, trades around 6 times. Despite the long-term gain from rivals like airBaltic filing for bankruptcy, Ryanair’s shares had fallen by 23% between the beginning of the year and its results last Monday, where it also announced an €800 million share buyback. Airlines have found some smoother air, but there are still clouds ahead.
     
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CONTEXT NEWS
The STOXX Europe Airlines Index rose 11% between November 2 and November 6, as crude prices fell in the wake of US midterm elections, and Ryanair, British Airways owner IAG, Deutsche Lufthansa and Air France-KLM reported earnings for the quarter ended September 30.

(Editing by Aimee Donnellan; Production by Streisand Neto)
((For previous columns by the author, Reuters customers can click on TASLIC/oliver.taslic@thomsonreuters.com))