Key Takeaways:
Investor sentiment across European airlines deteriorated sharply last week, with new data from Citi showing positioning turned unanimously negative as jet fuel prices soar. The shift in sentiment drove sharp stock price falls for sector heavyweights including International Airlines Group and Ryanair Holdings PLC, according to the note published April 29.
"If pricing stays higher for longer this summer, we think a number of our airline competitors in Europe are going to face real financial difficulties," Ryanair CEO Michael O'Leary said in an interview with CNBC. "I think there will be failures."
The pressure stems from a nearly 84 percent increase in the price of jet fuel since the start of a conflict in the Middle East on February 28, which has disrupted flows through the critical Strait of Hormuz. The price for Jet A-1 fuel has jumped from approximately $80 a barrel in March to over $150, according to O'Leary. In response, airlines have begun to cut capacity to manage costs. Germany's Lufthansa cut 20,000 short-haul flights through October, Scandinavian airline SAS is cancelling 1,000 flights in April, and Dutch carrier KLM is reducing capacity by 80 flights.
The turmoil threatens to cloud the critical summer holiday season, with some operators already seeing an impact. EasyJet and tour operator TUI have both announced drops in forward bookings, with easyJet taking on an additional £25 million in fuel costs in March alone. However, the impact is not uniform across the sector. O'Leary noted that Ryanair is well-insulated, having hedged 80 percent of its fuel needs, and will not impose fuel surcharges on customers. The head of the International Air Transport Association, Willie Walsh, told Reuters that while there is a risk of fuel rationing, underlying travel demand remains robust, distinguishing the current cost crisis from the demand-driven collapse during the pandemic.
This article is for informational purposes only and does not constitute investment advice.
