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Skies unlikely to clear up for some airline stocks to fly
IN A European market up about 14 per cent this year, only three sectors have completely missed out: telecoms, travel & leisure and banks. Among those laggards, airlines have been hit particularly hard. The shooting down of a US drone by Iran last week dealt another blow to an industry already facing too many challenges.
After a very poor performance in 2018, airlines are getting no respite. They're being hammered by a combo of a price war, high fuel costs on average, trade tensions and slower global growth. Several companies have issued profit warnings this year, including Ryanair and Lufthansa, while tensions in Iran have already pushed some airlines to divert flights.
The pain isn't over according to HSBC analysts, who anticipate "many" more profit warnings within the industry on weakening demand trends. Looking at individual performances, Wizz Air has been a real winner. Its recipe for success: exposure to faster growing central and eastern Euro-pean markets. At the other end, Norwegian Air has been particularly affected by the grounding of its Boeing fleet and failed merger talks with IAG.
Despite multiple downgrades, the consensus still sees upside for most stocks. The sector hasn't been under particular attack from shortsellers. Air France-KLM is the only company with a high short interest level.
Yet, the downside risks remain high. Cargo freight is highly sensitive to global growth, while trade tensions and protectionism also go against the sector. Strikes are another problem, particularly for Lufthansa with industrial action on the cards for July.
There isn't much to hope for. A potential return to synchronised global growth, spurred by a weaker dollar and dovish central bank policies, could extend the cycle and become a catalyst for airlines in the medium term. As for the short term, all eyes will be on the Trump-Xi meeting ahead of the G-20 this week. Fewer barriers and more trade is all the sector needs. BLOOMBERG