That the airlines have done badly these recent years is obvious – international lockdowns are going to cause problems. The question we actually want the answer to though is how well are they going to recover? For it’s possible that we all lost the desire to travel through loss of practice. Or, perhaps, we’re all gagging to get somewhere.
So, after the emergency capital raises, raising crushing debt loads to survive and so on, airline stocks are to be judged on how well traffic recovers. Well, that plus one important further consideration – how well does management predict that traffic?
The next few weeks are going to give us considerable insight into that. Airline shares are rising in anticipation but what matters here is whether the expectations are met or not.
IAG, WIZZ and EZJ all have operating results coming
The City seems optimistic and those airline shares have been rising. Note that we’re talking here of European travel, not intercontinental. A general optimism, boosted by newspaper stories of airports heaving with would be Easter getaways and so on. But how justified is all of that?
IAG (LON: IAG) will be reporting Q1 2023 results on May 5th. That’s the old British Airways plus Iberia, Vueling and so on. Easyjet (LON: EZJ) has a half year trading update on April 18th. Wizz Air (LON: WIZZ) reports monthly traffic numbers usually on the 2nd (or closest trading day following) of each month. Each of those reports will inform expectations about the next, obviously enough.
Just traffic isn’t enough though
The general traffic levels will be the most important number at first. If those are rising strongly then many will think that the problems are over. Be careful here though. These European airlines are built to deal with peak travel in the summer months. Winter always means carrying costs with no associated revenues and therefore losses. So, the profit number to be looked at will be a reduction in losses, not actual profits for the winter numbers.
So, general traffic numbers – if those are rising then we didn’t lose the habit and are indeed gagging for the beach and the getaway. Which is great. But then comes a further stage of consideration.
An airline seat flying empty is a dead loss for the airline. So, seat capacity, or loads, are an important metric. We’d like to see that near all the flights on near all routes were full – or close to it at least. The higher that capacity goes then the more profitable the flight and thus the airline is.
What we’re looking for in the results is both higher passenger numbers and also higher rates of seat sales.
Are the airlines actually large enough?
But then there’s that third stage. Nothing in investing is ever all that easy after all. The third stage is that what if the airline hasn’t put enough flights on? Then we’d get high prices from the dynamic models used, high load factors, so profits would look very high, which is great. But having too small a fleet flying would leave money on the table – it would mean would be passengers would not be carried. For a monopoly that’s fine – that’s what a monopoly does, restrict output so as to maximise profit. But of course, these airlines are not monopolies, they’re competing with each other. The impetus therefore is to expand the route capacity until the marginal revenue from the last passenger covers the marginal costs.
That means management of such an airline must have the airline the right size. Small enough that near all seats are filled, large enough that they’re not leaving trade and thus profits on the table for others to capture.
Airline prices will be volatile these few weeks
And it’s that which will be divined from these upcoming results and announcements. Not just is passenger traffic returning – something we’re really very certain it is – but are the airlines themselves the right size to be making the most of it? It’s a difficult calculation but it is the one which really determines airline corporate valuation and thus share price.
This might also be a useful time to consider that old stock market adage – buy the rumour, sell the fact. We’re expecting good results from IAG, Wizz, EZJ, the shares are rising in anticipation. If the results arrive just as they are expected, then the adage would suggest they’ll fall back again. Of course, if the results aren’t as good as expected then they’ll crumble. It’s only if the results are significantly better than what is already built into the price that they’ll then rise again.
Precisely because we’re into the reporting period for airlines in this first full year after the end of all the lockdown restrictions there’s going to be excitement about the results and thus share price volatility. But which way are the results, and the prices, going to go?
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