British Airways owner IAG falls on outlook worries

Discussion in 'Market News' started by Lily, Jun 6, 2016.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
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    Analysts at Barclays said airline demand is weaker than expected

    News of flight cancellations in May has sent shares in easyJet lower, but British Airways owner International Airlines Group is also under pressure.

    A hefty note by analysts at Barclays sees the bank cut its target price for IAG from 750p to 700p amid concerns about the outlook for airline demand. Barclays says:

    Even if their margins are still rising thanks to fuel savings, many airlines across the globe would admit that demand is softer than anticipated. In fact, on our analysis, total airline industry revenue is now falling, and its historic correlation with nominal GDP growth appears to have broken down

    So what exactly is going on? ..We argue that the revenue softness is driven by a combination of demand issues: geopolitical shocks, a mixed economic backdrop, and the effect of low oil prices on revenue, all set against ambitious industry capacity plans. We see reasons to be optimistic into the winter, especially if capacity cuts materialise. But meanwhile, guidance for many airlines hinges on improved trading in peak summer.

    Geopolitics: the biggest unknown. We believe sudden shocks to leisure demand from terrorism have been the single biggest contributor to European airline revenue weakness, particularly since the Paris attacks in November. While the shorthaul leisure consumer has proved relatively resilient – still travelling within Europe, but perhaps switching to ‘safer’ markets – inbound longhaul tourists are more likely to avoid the continent outright. We think US, Chinese and Japanese demand could be weak for the rest of this year. However, business travel and outbound longhaul tourism have been fairly immune. Risk of further incidents is clearly reflected in the recent sector derating.

    ‘Underlying’ demand: some optimism into the second half. Leaving aside geopolitical shocks, our industry model suggests that the underlying drivers of airline revenue are the economy (nominal GDP) and the oil price (with a lag). The economic backdrop in Europe and the US is perhaps best described as stagnant, and there are significant headwinds in emerging markets with dependency on the energy sector (Brazil, West Africa, Russia). However, provided the core economies remain stable, our model suggests underlying revenue may have troughed in the first half of 2016, as the oil price effect should annualise through the summer and turn positive. Furthermore, if the UK were to vote to remain in the EU, our economists believe corporate capital expenditure would rebound in the second half of the year.

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