MARKET OUTLOOK: Should traders “go away” from airline shares?
Published: May 25, 2012
There was a stock market adage for London-based brokers suggesting you “should sell in May and go away” – not just to enjoy the summer but rather that low volumes and general inactivity meant share prices were unlikely to do much. In the case of airlines where shares are noted for being volatile, this may be pertinent advice given recent results and the outlook in accompanying announcements.
As a whole, airline shares tended to outperform the markets in the first quarter of 2012, but the outlook appears much more challenging. While there have been few real surprises in the numbers, clearly investor relations departments are doing a good job, the most interesting thing has been the “mood music”.
No matter an airline’s location, it faces three common issues: fuel; uncertain or challenging economic conditions; and their impact on international cargo. The difference is in the impact each factor will have, and that depends on the location of the airline and its market focus.
There are, however, varying degrees of optimism for management and investors in terms of reaching objectives, financial or otherwise. At the simplest level the outcome of a company is determined by a combination of management actions and market outcomes. What has been clear for some time in Europe is that reaching meaningful targets will depend more than ever on management actions. Not surprisingly we are seeing the bulls in Europe’s analyst community not only increase the period when they expect the share price to perform – against markedly lower share price targets a year ago – but base their continuing buy recommendations on an improving outlook in two to three years time rather than an expectation of solid numbers. This is a long look into the future, one in which patience and trust may be exhausted.
Against a background where many airlines forecast the likely outcome of the next six months only, comes the inevitable question of why there are still so many buy recommendations. That airlines are highly geared to economic recovery is well known. The problem is the economic outlook appears for many to be challenging at best and declining at worst, with few signs of a meaningful recovery.
There have also been some telling headlines in airline earnings releases. For example, International Airlines Group reported an “operating loss despite strong revenue growth” when the latter was clearly not strong enough. In this case the analysts appear to be focused – again – on what is, in stock market terms, the very long-term. Even then, current market forecasts for the operating result suggest a less than compelling story. Furthermore BMI losses now have to be factored in on top of those at Iberia.
In the case of Singapore Airlines, the statement that “high fuel prices and increasing yield pressure weigh heavily on group earnings” is a frank assessment of the recent and likely future operating environment – not least when management highlights that “promotional activity necessitated by intense competition is expected to place downward pressure on yields, especially in Europe and the USA”, adding that the economic outlook in these markets is “anaemic”.
In Latin America, LAN/TAM benefited from a strong domestic market environment but the combination of the fuel price and cargo weakness clearly impacted its international services.
I often say it is what you do in the upturn of the cycle that sets out how you perform in the inevitable hard times. The problem is the last upturn was some time ago. For many airlines the challenge is not only how to reduce cost without compromising the business, but how to do it quickly. And the European majors, while they have medium-term plans in place, cannot act as quickly as airlines in other parts of the world. Some suggest consolidation may be the panacea for mature markets. In the USA there has been progress, but in Europe cross-border consolidation appears to have increased management challenges rather than shareholder value. Indeed, consolidation is only worthwhile as long as you are able to realise the benefits.
Stock markets are forward looking, do not like surprises and can be particularly unforgiving. Shares are also for buying and selling and given the majority of returns come from share price movements rather than any dividend stream, the timing of buy-sell recommendations are paramount. There are likely to be many share-trading opportunities given the industry outlook, but the problem will be whether airlines can continue to attract sufficient investor attention. This will have a bearing on whether many airlines can address the equity markets for funding in the medium and long term as potential investors may look elsewhere.
For airlines it may well be more than “sell in May and go away”, the need will be to encourage them to reconsider the sector. In this respect tangible performance rather than just the investment story are likely to be necessary in a situation where it is more of a case of “show me” than “trust me”.