Ash Cloud Knocks Airline Shares
Renewed volcanic activity has recently caused a second wave of flight restrictions in the UK, compounding the difficulties facing the UK’s leading airlines. But how will key airline shares react in the wake of this latest setback?
A number of British airports were closed through Sunday and Monday, with the ash cloud’s proximity to Heathrow and Gatwick inflicting flight restrictions on those major sites. While all UK airports are now open, delays are expected to domino through to the end of the week and analysts are increasingly concerned that together with the huge losses from the first swath of cancellations, this second (albeit lesser) bout of restrictions could cause irrevocable damage to airlines' yearly profits.
Is the worst behind airlines?
British Airways' share price has unsurprisingly lost altitude over the last few days, a fall mirrored in the losses suffered by airline and tourism companies across Western Europe as the volcano’s shadow stretches on into the end of the week.
However, on Tuesday the Civil Aviation Authority amended safety rules to allow flights in higher densities of ash than previously permitted, prompting predictions of an immediate future free of restrictions for UK airspace and going some way to offset fears that the Icelandic volcano's eruptions could continue to cloud the skies for months or years to come.
On the other hand, with conservative estimates of airline losses during the initial ash cloud disruption coming in at $200 million a day in revenue, some equity traders will no doubt feel that low share prices accurately reflect the airlines' recent hardships and that any spike could prove premature - provoking a downwards correction further down the line.
Airlines face further challenges
Ash clouds aside, British Airways has also found itself beleaguered by a series of five-day walkouts organised by cabin crew unions. Despite winning a high court injunction against the most recent industrial action planned, BA will be forced to operate a reduced service for the rest of this week.
And just as for BA, other UK airlines have compounded the flight restrictions with storm clouds of their own; Ryanair was fined €3 million after customer care accusations in the wake of the original ash cloud crisis, while easyJet has run into difficulties after founder Sir Stelios Haji-Ioannou resigned from the board.
EasyJet shares went into a tailspin at the beginning of the week, as Stelios registered his displeasure at management strategy by stepping down from the board of directors. Objections from the company's founder to planned expansion of the easyJet fleet have worried analysts, who fear that termination penalties should the airline back out of commitments to purchase 57 aircraft over the next three years could prove prohibitive. Chairman Michael Rake defended the board's plans on Tuesday, but share prices are yet to show any signs of a climb back to earlier highs.
A buying opportunity?
While the airline sector remains volatile, investors could see this drop in airline shares as an opportunity to buy while prices are low in anticipation of a boost from the the busy summer tourist season, now that restrictions have been relaxed to a degree.
Likewise, those unsure whether the airlines will see further falls or claim back the year's earlier highs could take advantage of the volatility trading opportunities presented by options or binaries. Even over the short term, with airline stocks trending sideways at the moment, selling volatility could present a chance to take a quick profit.
On the other hand, the problems for airlines extend well beyond no-fly zones and into the boardrooms and UK courts. While its planes might be airborne again, BA in particular will face a challenge to keep services running smoothly in the face of long-term opposition from the unions. Any further disruption will simply add to the downward pressure on airline shares.
Take a position
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Updated: 19/05/10
