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Will The Stand-Off Between Russia And Turkey Hurt easyJet plc & BBA Aviation plc?

The news that Turkey has downed a Russian fighter jet over Syria has pushed travel shares lower this morning, as investor fret about the repercussion this latest incident could have on the tourism industry.

BBA Aviation (LSE: BBA) is leading the sector lower. At the time of writing, the aviation support services provider’s shares have fallen by more than 7% on the day. easyJet’s (LSE: EZJ) shares have fallen 3%; International Consolidated Airlines is down 3.4%, and Thomas Cook’s shares have fallen 4.4% to a new two-year low.

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Feeling the fallout

It’s clear that the market is concerned about the effect of recent events on the demand for air travel among passengers. Any slowdown in demand is almost certain to impact easyJet’s sales growth.

However, the company’s management doesn’t seem to believe that there will be a significant reduction in customer numbers over the long term. Indeed, easyJet’s chief executive Carolyn McCall pointed out last week that heightened airport security measures and worries about air travel would dent customer numbers in the near-term. But history showed that passenger growth always resumed over the long-term, after a “cooling off” period.

All in all, easyJet believes the demand for its services will continue to expand over the long-term. Management is targeting 7% per annum passenger growth while sustaining margins through rigorous cost control. The company is also planning to add more seats to existing aircraft, which should help it remain ahead of its competitors.

easyJet is so upbeat about the future that the company has just announced that it is ordering 36 Airbus Group SE narrow-body jets for delivery between 2018 and 2021 seating 186 passengers each. The new planes come with more fuel-efficient engines, allowing easyJet to retire smaller A319 planes faster, saving £27m by 2021.

City analysts expect easyJet’s earnings per share to grow 7% next year to 149.4p, indicating that the company is trading at a forward P/E of 11.3. The shares support a dividend yield of 3.6%.

Concerned investors

BBA’s shares have been on a downward trend since the company announced the transformational acquisition of rival group Landmark Aviation, for £1.3bn. Since the middle of September, the company’s shares have fallen by around 40%, although much of this decline comes from the rights issue where shareholders could buy shares at 133p. The ‘actual’ loss since mid-September falls somewhere between 10% and 15%.

The City is concerned about BBA’s deal to buy Landmark Aviation for two reasons. Firstly, it will lump the company with $1bn in new debt, even after BBA raised £748m via the aforementioned rights issue. And secondly, the deal won’t be earnings enhancing until 2017.

Still, when the deal is completed BBA’s business jet terminals will account for 80% of the enlarged group’s earnings, giving the company a leading position in the corporate jet sector, which growing at a consistent 3% to 4% per annum. This growth is unlikely to slow because of terrorist threats. In other words, BBA is unlikely to be affected by today’s events, but the company’s shareholders have other worries.

City analysts expect BBA’s earnings per share to grow 19% next year to 16.2p, indicating that the company is trading at a forward P/E of 12.1. The shares support a dividend yield of 4%.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended BBA Aviation. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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