Airline Turbulence
The last time airlines had to contend with oil priced over USD 100 was back in 2008. Despite a year of recovering demand and increasing ticket prices, airlines are reviewing their business models and hedging strategies to be able to profitably absorb their sensitivity to the price of oil. We look at investor sentiment towards; Deutsche Lufthansa Ag (ETR:LHA), Air France-KLM (EPA:AF), EasyJet (LON:EZJ), AMR Corp (NYSE:AMR) and United Continental Holdings (NASDAQ:UAL).
The Bloomberg global airlines index has slid by 6% so far this year. This highlights the industry’s dependence on the price of oil which represents 40% of operational cost for airlines. Estimates from Morgan Stanley indicate that European airlines have only hedged 60% of this year’s fuel requirements, whilst the USA and Asia remain more exposed having hedged less than 35%.
Deutsche Lufthansa, Europe’s second largest airline, posted a profit in 2010 compared with a loss of EUR 34 million a year earlier. Prior to the Libyan crisis, the CFO warned of reduced earnings this year due to the cost of fuel despite actively hedging. Investors prematurely began covering short positions in November, ahead of the share price fall which has continued. Short interest remains flat at 2% of total shares outstanding on loan, having decreased by 60% between December and January.
The largest airline in Europe, Air France-KLM, led a fall in share prices across the sector last month, as it reported an unexpected quarterly loss and also cut its forecasts. The company is further expected to raise air fares in response to the EU’s emissions trading scheme, which is being expanded to include airlines by the end of the year. European airlines are nervous that U.S. airlines could be made exempt from the scheme, handing the latter a crucial competitive advantage on international routes. Short interest in Air France-KLM has increased from 1.6% to 4.3% over the past month. Holdings on long only investors who lend, which can be used as a proxy for institutional ownership, has decreased by 12% over the past month.
AMR Corp’s American Airlines was last week forced to roll back its latest air fare hike in order to remain competitive. While the company continues to reduce its planned flight growth programme, short interest has been building over the quarter and has more than doubled to 9.4% of total shares outstanding on loan. Holdings of large funds who lend have been in decline over the past year and currently stand at 25% of the total shares outstanding.
United Continental Holdings is also putting growth plans on hold as a direct implication of rocketing fuel prices. The world’s largest carrier, created following October’s merger, is considering grounding units of its fleet and disposing of less fuel efficient aircraft. However, the retrenchment is focused on regional flights, with international routes set to expand. Short interest has increased over the first quarter of 2011 from its low of 9% to 12% of total shares outstanding on loan.
Both AMR Corp and United Continental Holdings currently have convertible bonds in issue which could affect the amount of total shares outstanding on loan.
The fuel crisis in 2008 resulted in casualties amongst the airline industry, most of which were small, low cost airlines, which were unable to absorb the rising costs. European low cost airline EasyJet has regained investor confidence over the past year reducing short interest by 85% since May. However, short interest has seen a slight uptick to 1% of total shares outstanding on loan this year. Although short interest is low, EasyJet has warned that soaring fuel costs could double first-half losses and the shares are currently trading at just 10 pence above the annual low.
