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