Ash Cloud hits Airline Shares
Renewed volcanic activity has recently caused a second wave of flight restrictions in the UK, compounding the difficulties facing the UK’s leading airlines. But how will key airline shares react in the wake of this latest setback?
A number of British airports were closed on Sunday and overnight into Monday, with Heathrow and Gatwick suffering flight restrictions due to the ash cloud’s proximity. While all UK airports are now open, knock-back delays are expected to push through to the end of the week and there are fears that this year’s profits will have been irrevocably damaged.
Is the worst over for airlines?
British Airways’ share price has unsurprisingly taken a tumble over the last few days, a fall representative of the losses suffered by airline and tourism companies across Western Europe as the volcano’s shadow pushes flight disruptions further into the week.
However, on Tuesday the Civil Aviation Authority announced new rules allowing planes to fly in higher densities of ash than previously permitted, resulting in predictions of a restriction-free UK airspace for the immediate future – going some way to offset fears that the volcano could continue to spew ash into the atmosphere for months or years to come.
On the other hand, with conservative estimates suggesting airlines were losing $200 million a day in revenue during the initial ash cloud disruption, some equity traders will no doubt feel that share prices will have to remain low to reflect the significant loss of earnings.
EasyJet, BA and Ryanair face further challenges
Ash clouds aside, British Airways has also found itself beleaguered by the threat of industrial action. Despite winning a high court injunction to prevent the most recent planned walkout, BA will be forced to operate a reduced service for the rest of this week.
And just as for BA, the flight restrictions haven’t been the only storm cloud for other UK airlines; Ryanair was fined €3 million after customer care accusations in the wake of the original ash cloud crisis, while easyJet has run into difficulties after Sir Stelios Haji-Ioannou resigned from the board.
EasyJet shares nose-dived at the beginning of the week, as the company’s founder stepped down in a protest over management strategy. Stelios’ objections to planned expansion of the easyJet fleet have worried analysts, who fear the penalties that would come with the termination of the budget airline’s commitments to purchase 57 aircraft over the next three years. Despite Chairman Michael Rake’s defence of the plans on Tuesday, share prices as yet show no sign of a significant climb back.
A buying opportunity?
While the airline sector remains volatile, investors could see this drop in airline shares as an opportunity to slip on-board and buy while prices are low. With draconian flying restrictions now relaxed, airlines may see their share prices recover as the busy tourist season approaches.
Likewise, those unsure whether the airlines will see further falls or claim back the year’s earlier highs could take advantage of the volatility betting opportunities presented by options or binary bets. Even over the short term, with airline stocks trending sideways at the moment, selling volatility could present a chance to take a quick profit.
On the other hand, as we have discussed, the airlines’ problems extend well beyond airspace closures and into the boardrooms and UK courts. While the planes might be flying again, British Airways will certainly face an uphill struggle to keep its services running smoothly. Any further disruption will simply add to the downward pressure on airline shares.
Take a position
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Updated: 19/05/10