The FTSE 100 finds itself back on the defensive on Monday. It’s not a reflection of fresh fears over US-Chinese relations though, and concerns over new deadlock on the trade front. This start-of-week reversal instead reflects bearish comments on the aviation industry by Warren Buffett.
Airlines easyJet and IAG, along with plane engine-builder Rolls-Royce lead today’s board of biggest Footsie losers. It follows news at the weekend that Buffett’s Berkshire Hathaway had sold all of its holdings in four major US airlines. “The world [has] changed for airlines” following the Covid-19 outbreak, Buffett said.
When the so-called ‘Sage of Omaha’ speaks, financial markets take note. It’s not difficult to subscribe to his school of thought either. Planes remain grounded as countries across the world remain on lockdown. The picture is clear as mud as to when airlines will be able to take to the skies en masse again. And even when they get the go-ahead, a tough economic environment could weigh on demand from both holidaymakers and business passengers.
Ah, but…
Not everyone is holding their head in their hands when pondering the fate of the UK operators. Ryanair chief executive Michael O’Leary expects significant fare-slashing to help traveller numbers rebound in the near-term as quarantine measures are gradually unwound.
The Irish airline’s head honcho actually expects 2021 to prove a fruitful year for the industry. He’s commented that “2021 has every prospect of being a bumper year in terms of earnings,” noting lower ticket prices will be offset by cheaper fuel values.
Provided that the biggest airlines like easyJet and IAG have the balance sheets to survive the current crisis then they could still thrive over the medium- to long-term. The likely extinction of rivals (like FlyBe) could provide these Footsie firms with an extra sales boost too. But, of course, don’t rule out those recent comments from Buffett. You don’t become a stock market billionaire without a sound view on events!
A FTSE 100 stock I’d avoid
The jury may be out on IAG et al. But there are several FTSE 100 shares whose long-term outlook has definitely worsened following the coronavirus outbreak. British American Tobacco is one, as I recently described. Luxury fashion giant Burberry Group (LSE: BRBY) is another.
Shares in Burberry’s business dropped to their cheapest for almost four years earlier this month, reflecting the impact that the coronavirus outbreak will have on its sales. The slump followed its guidance that retail sales in the three months to March would be down almost a third, and down between 70% and 80% in the final weeks in the period.
Clearly, the mass closure of its stores was going to hammer sales. Things, however, are likely to remain difficult long after the shutters have gone up. Data today showed the economy in its critical Hong Kong marketplace fell 8.9% in quarter one, the biggest dive in history. And conditions there are likely to remain difficult as mass protests persist and US-Chinese trade relations come under pressure.
At current prices, Burberry trades on a forward price-to-earnings (P/E) ratio around 21 times. This is far too high, given the severe economic fallout of the Covid-19 crisis in all its global markets. It’s a scenario that’s hit the Footsie firm’s turnaround plan significantly.
So I’d rather put my money in other FTSE 100 stocks today.
