Shocks
and aftershocks Aug/Sep 2016

Of all the industry sectors it appears that the European airlines have been the hardest hit by the surprise result of the referendum vote by Britain to leave the European Union. The following charts show the share prices of the major European carriers, indexed (after translation into Euros where necessary) to the 23rd June. The prime reason for the negative reaction is the uncertainty generated by the result — for further edification see next article.

Both IAG (aka British Airways) and easyJet were marked down by 40% (10-15% of which was currency related); Ryanair (a major non-UK player in the UK market), and strongly growing Norwegian, by 20%; Wizz, because it is quoted on the London exchange and does good business providing links with Central and Eastern Europe, by 30%. 

This reaction seems to us a bit of overkill, and the markets may have forgotten that the UK is still one of the strongest O&D aviation markets in the world. Meanwhile IAG is sitting on the best aviation real estate at Heathrow, which following the change of political power is unlikely to be granted the option to apply to build another runway.

Even the other two major European network carriers were affected. Lufthansa and Air France-KLM each dipped by 15%. Since the vote, Lufthansa has stabilised at around 10% below the level on the 22nd June while Air France-KLM has come under further pressure and its share price is some 50% below this year's peak in March. 

The UK market index meanwhile has remained relatively steady (in Euro terms) while Sterling has dipped by 15%.

In the US markets there was a knee-jerk reaction, but most of the major players' share prices have rebounded. The best performer since the end of June being American — ironic considering that the uncertainty surrounding Brexit could well undermine its trans-Atlantic joint venture with BA and Iberia. But then this is a recognition of the strength of the dollar following the vote and the parochial nature of the US stock markets.

Meanwhile, the failed Turkish coup in July sent its own shockwaves into the aviation sector. The share prices of both THY and Pegasus plummeted immediately then recovered, in effect reestablishing the downward trend seen since early this year when Turkey became embroiled in the Syria war, and tourism cratered.

In the first half of 2016 THY’s revenues fell 3% to $4.63bn compared to 2015, and a net loss of $647m was recorded in contrast to a profit of $406m in 2015. Pegasus’s revenues in the first six months of 2016 (its low season) totaled $514m, slightly up on 2015, but the pre-tax loss slumped to $102m compared to $9m in 2015.

In the short term, Turkish aviation ambitions in Europe (see Aviation Strategy, May 2016) have been thwarted by geopolitics. In the longer term, they might well recover — both airlines have strong operating models — but negotiating on access with an EU sans the UK, and now dominated by protectionist-leaning France and Germany, looks a bit problematic.