Points of View: Airlines

This week Harry Tyler of NW Brown looks at UK-listed airline companies and two significant factors that influence their share prices; oil price and industrial action.

Jet Fuel is a major component of an airline’s expenditure, so clearly the fluctuation in oil prices will impact costs and therefore profits. This typically leads the share price of airlines to move in the opposite direction to fuel prices, in the short term. Airlines however endeavour to mitigate this risk in two ways: using complex financial instruments to hedge against fuel price movements and passing on any increase in cost to passengers. Furthermore, higher fuel prices act as a barrier to entry, so dissuading new entrants to the industry who could otherwise disrupt the incumbents.

Industrial action resulting from union disputes is another perennial sticking point. These range from pilots demanding better pay to baggage handlers seeking a better working environment. These disputes create costly disruption for airlines both in respect of compensating passengers for delayed flights and lost customers frustrated with the particular airline. Unions and employers generally resolve their issues promptly, however the threat of industrial action remains ever present in this highly unionised industry.

In addition to the above, the sector suffers disruption from terror threats and adverse weather. These unpredictable events cause volatility in the share price and from an investment perspective it is unsettling that they are beyond the control of management.

Offsetting these negatives, passenger numbers have grown at an average of 5.5% per annum over the last twenty years and together with the limited capacity at a number of airports has given airlines control over their pricing power.

The sector is therefore not without its rewards, but the risks and volatility associated with regular headlines on terror threats, weather warnings, strikes and gyrating fuel prices will put many off.

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