City Insider: Rising oil prices could come at exactly the wrong time for airlines

City Insider: Rising oil prices could come at exactly the wrong time for airlines

City Insider - FT journalist David Stevenson on the travel industry

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I'm not sure I'd want to be managing an airline at the moment! The lovely, long hot summer is gone, those holidaymakers are now returning en masse and suddenly the worries are starting to pile up.

On initial inspection, airlines - just like travel companies - should be welcoming the evidence of strong domestic growth and signs that Europe may be turning the corner at long last.

But a very big unknown is lurking in the wings: rising oil prices, courtesy of our friends ruling Syria.

Strangely all those oil bears who've recently been banging on about shale gas and how it will eventually utterly transform international energy dynamics have gone a tad quiet of late.

What's clear is that oil prices are highly susceptible to changes at the margin, and the Syrian affair - along with the Egyptian fiasco - is having a rather nasty series of marginal side effects.

The core worry seems to be that Shia/Sunni divide could easily spiral out of control, sparking a Middle East bust-up of epic proportions.

This geopolitical uncertainty also happens to come at a rather unfortunate moment as the Libyan and Iraqi oil sectors suffer from infrastructure problems, strikes and shuttered capacity.

Investment banking analysts have been quick to run the numbers.  The highly rated team at SG probably speak for a consensus view which is that Brent prices might climb to $125 if there's a brutal but quick spat but possibly hit as high as $150 if the affair spirals out of control.

Clearly this comes at almost exactly the wrong moment for the airlines, nearly all of which have been quietly attempting to turn around their business models in the last 12 months.

Over the summer we've had a slew of results from airlines big and small, all suggesting that business was looking bright.

IAG at the turning point

The obvious outfit at a key strategic turning point is IAG, which returned to an operating profit in the second quarter of 2013, producing a profit of €245 million, off the back of revenues that grew 3.4% to €4.6 billion and increasing capacity across the group (up 4%).

What must be especially pleasing for Mr Walsh is that BA's operating profit was sharply up (from €94m to €247m) whilst Iberia's operating loss was cut by more than 50%.

In fact by one analyst’s reckoning this was the first quarter in 11 that saw the Spanish carrier post a year-on-year improvement in its operating result. The balance sheet is also looking much healthier now, with the cash balance now at €3.6bn - unit costs were also down across the group by 6%, helped along by fuel costs which went down by 8%.

Crucially IAG seems to be betting the bank on growth at Vueling, Europe's third largest low cost carrier. Profits at this budget airline doubled, with seat numbers up 15%, load factors increasing and revenue per passenger up 5%.

It is now quite conceivable that Ryanair is facing not one but two major competitors in the LCC space - Easyjet and Vueling. One other number worth dwelling on - IAG also increased unit revenue growth in Asia-Pacific in the quarter, bucking the recent trend in the sector to report sharply lower numbers.

It looks like IAG is now trading on an upwards trend, although a lot of that growth in profits is predicated on the fuel bill falling sharply - it was looking for a €400 million reduction, which may become something of a stretch given current increasing fuel costs. It seems now that IAG is likely to hit €500 million operating profits for 2013, which could see the shares move markedly higher.


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