The rise in the price of oil is becoming more than a headache for European airlines. At least, that is how the investment firms that cover its evolution understand it, which in recent months have drastically reduced their profit estimates for 2022 and 2023 despite keeping their sales forecasts almost intact.
Specifically, since January, the market consensus has reduced by 49% and 19% respectively, the profit figure expected for the large companies in the sector for next year and the next. In other words, IAG , Air France , Lufthansa , Ryanair , easyJet and Wizz Air Holdings will register lower profits than initially expected despite the fact that their sales will not deviate more than one percentage point from what was estimated at the beginning of the year.
And it is that, as they assure from Bank of America, “the recovery of the trips is underway in Europe, with the intra-European reserves to more than two thirds of the levels of 2019, and the international demand rebounding after the announcement of reopening of the United States “, something that favors that the hit in stock market is smaller than it could have been .
The coverage, insufficient
The increase in the price of a barrel of crude has always led to a head warming for companies in the sector, who see how the raw material from which the fuel used by their planes is made becomes more expensive. For this reason, historically they have resorted to so-called hedges, insurance to guarantee the price of crude oil at a certain level for a specific period of time.
However, as analysts have pointed out on numerous occasions, increases in the price of oil are especially negative when demand is not the most adequate or is in recovery -as is the case today-, since it is not easy to pass the highest cost to the end customer. This is stated by Karolina Noculak, Investment Director of Aberdeen Standard Investments, stating that the companies most at risk are those that cannot pass on the cost increases to their final consumers / buyers such as “some airlines and logistics or transport companies , which will likely suffer as input costs continue to rise. “
The firms most affected in this regard are IAG, Detsche Luftansa and Air France
And the fact is that an increase in unit terms can cause the weakest airlines to even be forced to close or force a greater consolidation in the sector.
“Competition remains very intense, despite the collapse of European small and medium-sized airlines over the past 20 years. Many smaller airlines survive , while newer ones continue to find support, thanks to low interest rates and low interest rates. abundant supply of capital and cheap airplanes, “explain Azza Chammem, analyst at Scope and Sebastian Zank, deputy director of corporate ratings at Scope.
In this sense, although the experts consider that the occasional increases in the oil price should only influence investor sentiment about these companies in the short term, and that later the positive effect of the fuel hedging contracts on their income statements should offset far this impact, the reality is that in the end these firms are affected by the increase in one of their most recurring costs.
And according to data collected from Bloomberg , demand for jet fuel will rise through April 2022, while the price of jet fuel has soared 22% since June 30.
The big affected
The firms most affected in this regard are IAG, Deutsche Luftansa and Air France , which has seen how analysts have gone from forecasting timid average gains for it in 2022 to now expecting losses (see graph). In the case of the Anglo-Spanish and German firms, the cut is over 60%.
Evolution of airlines
And it is not only a behavior that affects only the so-called flagship companies, but some of the low-cost firms have also been affected. The case of easyJet is the most obvious in this regard, seeing as its 2022 earnings forecasts have also been reduced by more than 60% since January.
All this, however, has not created a hindrance in the analyst’s recommendations about themselves. In fact, only the recommendation of Air France-KLM and Wizz Air is now more negative than the one at the beginning of the year and Ryanair and IAG are still the only ones with a buy recommendation in the sector, while Air France and Lufthansa receive a poster of sale.