International Consolidated Airlines Grp, Ryanair Holdings Plc And easyJet plc Tumble After Profit Warnings

Could we be in for a fall from International Consolidated Airlines Grp (LON:IAG), easyJet plc (LON:EZY) and Ryanair Holdings Plc (LON:RYA)?

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rrAir France-KLM revealed a shock profit warning Tuesday morning, and it sent the share price of the Franco-Dutch firm down 5% as a result — and UK-listed airlines have followed suit. The news comes hot on the heels of a similar warning from Germany’s Lufthansa, just a few weeks ago.

As I write, the International Consolidated Airlines (LSE: IAG) price is down a similar 5%, to 343p. In fact, shares in IAG, which owns British Airways and Spain’s Iberia, are down 25% since their February peak of 455p, but are at least still up 25% over the past 12 months. So what gives?

Profits lowered

Air France-KLM said it is not going to meet its earlier expectations, and lowered its earnings forecast for the year from 2.5bn euros to 2.2-2.3bn euros. On top of Lufthansa’s telling us it will not achieve its profit targets for the next two years, the whole industry is looking a bit fragile.

Both Air France-KLM and Lufthansa cited increasing competition as a major part of their problems, and that’s probably what has scared IAG investors so much — all three airlines operate in pretty much the same way, and earn a lot of their profits from cargo and business travel.

Budget airlines hit, too

ryanairSo things must be looking up for the budget airlines? Actually, no, as Ryanair (LSE: RYA) (NASDAQ: RYAAY.US) has also taken a tumble. It’s not as big a drop as IAG’s, but shares in the airline that everybody loves to hate dropped 2.2% — and they’re down 5% over the past year, after recovering from a slump towards the end of 2013.

And easyJet (LSE: EZJ) as well has seen a fall, down 3.2% to 1,283p — and easyJet shares have also fallen over 12 months, by 5%.

Intense competition in the airlines business has led to what Air France-KLM called “over-capacity on certain long-haul routes, notably North America and Asia” — and a supermarket-style price war is just not what the airlines need right now. Lufthansa had earlier complained about middle-eastern airlines like Emirates being at an advantage due to their state ownership.

IAG’s most recent traffic report told us that traffic was up 5.9% in June, though capacity was 8.5% higher. Things were skewed a little by the World Cup, but we’ll need to keep an eye on that possible overcapacity.

Overcapacity, really?

For its part, Ryanair reported a 5% rise in customer numbers, and told us its load factor was up 4 points to 88%. Meanwhile easyJet reported a 10% rise in passenger numbers for June, again coupled with an improved load factor, this time to 90%.

If there’s overcapacity in the budget market, it’s not obvious — but the big airlines could be in for a rough ride.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan does not own shares in any companies mentioned in this article.

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