The collapse of Monarch and Ryanair’s woes with its pilots’ holiday rotas have thrust airlines firmly into the headlines. Are these isolated pockets of turbulence or are airlines a risky investment?
Monarch going into administration may have come as a nasty surprise to people who had booked flights and holidays with the company but there were signs last year that all was not well.
The end for Monarch could have come a year sooner as the CAA was close to not renewing its licence last September. The CAA even went as far as spending £25m to charter planes to get holidaymakers home in case Monarch went under.
It took an injection of £165m from Monarch’s owner Greybull Capital to convince the CAA to let Monarch carry on flying.
Things had not been going Monarch’s way. Terrorist attacks in two of its key markets, Egypt and Tunisia, had seen the Foreign Office advise against travel to those destinations. Unrest in Turkey, another key destination, saw demand plummet.
Monarch was hit further by the weak pound as most of its income was in pounds but most of its outgoings, such as aviation fuel, were in dollars.
Monarch’s demise was good news for other airlines, which saw their shares prices rise. On the day the news broke, BA’s parent company IAG’s shares closed up 2.36%, easyJet was up 5% and Ryanair, which is listed in Dublin, was up 3.87%.
Flying into trouble
Transport Secretary Chris Grayling seemed confident that the Monarch collapse was a one off, saying: “Let nobody think this is a sign of general problems in our aviation sector. Monarch has been a victim of the success of other airlines, such as easyJet and Jet2.”
But Monarch is not the only European airline to enter administration recently. Alitalia went under in May and airberlin in August. Both airlines went into administration after their common major shareholder, Etihad, decided not to put up any more funding.
They are both still flying thanks to loans from their respective governments. Alitalia is being propped up by a €600m bridging loan. The airline has received more than €7bn in state aid over the past decade. Airberlin, the second largest airline in Germany, has benefitted from a €150m loan.
Continuing flying while in administration does not seem to be an option in the UK. Monarch’s chief executive Andrew Swaffield has said that: “The UK’s insolvency framework doesn’t allow airlines to continue flying, unlike in Germany or Italy.”
Ryanair’s problems with its pilots’ rotas have led to up to 50 flights a day being cancelled until the end of October and 18,000 flights on 34 routes will go over the winter period between November and March. Some 750,000 passengers have been affected.
Employing former Monarch pilots might be a solution but they are used to flying Airbus planes and would have to be retrained to operate Ryanair’s all-Boeing fleet.
Amid reports that Ryanair pilots are being tempted away to rivals Jet2 and Norwegian, Ryanair chief executive Michael O’Leary has written to pilots trying to appeal to their better nature and offering them a loyalty/productivity bonus of up to €12,000.
But Ryanair is not the only airline with staffing problems. Long-established BA cabin crew have much better contracts than more recent employees. The newer mixed fleet crew have staged a number of strikes over pay and conditions.
BA has got round this by using nine Qatar Airways A320s and A321s complete with crew – a process known as wet leasing. Qatar Airways owns 20% of BA’s parent company.
Qatar Airways currently has capacity to spare as in June the governments of Saudi Arabia, the United Arab Emirates, Egypt and Bahrain severed diplomatic relations with Qatar and Qatar Airways lost access to the airspace of these countries.
Up, up and away?
If the BA IT debacle is anything to go by, passengers seem to have short memories about airline woes and Ryanair is good at what it does.
Aviation consultants RDC’s report on low cost carriers showed that only Ryanair and WizzAir made a profit in the first six months of 2017.
RDC says of Ryanair: “On lowest cost, lowest average revenue, and highest profit, it really is out there on its own. Lowest cost clearly is winning.”
EasyJet saw its share price fall on 6 October despite issuing an upbeat update ahead of its full year figures. It saw record passenger numbers of 24.1 million in the three months to September and a record load factor.
EasyJet has also been affected by the weak pound, which has lopped £100m off profits, but it said it expected its full year profit to be in the range of £405m to £410m, at the upper end of previous guidance.
Ian Forrest, investment research analyst at The Share Centre says: “The weakness of sterling, fierce competition and uncertainty over future leadership mean the shares are no better than a hold.”
The Share Centre prefers BA’s owner IAG. Analysts Liberum agree, picking only IAG as a buy out of the big three European airline groups, Lufthansa, Air France-KLM and IAG.
Michael O’Leary’s letter to pilots ends with a graphic headed “Norwegian in financial trouble” showing the share price down by 21% in the year to date. Norwegian’s passenger numbers were up 14% year on year for September and the company says it is not in financial trouble.
Future shape of the skies
While the American airline market has seen a lot of consolidation, less has happened in Europe. When fuel prices start to rise some of the less efficient airlines may find themselves vulnerable to take over by one of the big players: Lufthansa, Air France-KLM, IAG, Ryanair or easyJet.
For shareholders in different airlines that could mean take off, or a crash landing.