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Buy or sell – Are airlines a buy now the oil price is down?

  Shares in airlines around the world have been battered in 2008 due to the soaring cost of fuel, and have yet to recover despite a halving of the oil price since its $147 a barrel spike in June.

 

Shares in easyJet are down over 50% over the year, including 20% in the past month -- during which Brent crude has fallen around 30% to below $70 a barrel.

British Airways has fared even worse, down 55% this year and 35% in the month. The carrier has cut its controversial fuel surcharge as a result of the falling fuel price, but its share price has yet to feel the benefit. Are the risks of falling consumer demand as a result of a global economic downturn outweighing the benefits of lower oil?

Here are some perspectives:

 

MORE OPTIMISTIC

Some analysts say the decision by most airlines to cut capacity and hike fares to combat higher fuel costs will now provide extra benefits in the current environment. “I’m becoming more optimistic -- demand outlook is less than rosy but a falling oil price provides quite an effective counter-influence,” said Douglas McNeill, airlines analyst at broker Blue Oar. “The oil price is now no higher than a year ago, but fares are. The US airlines are reporting very good yield figures in the third quarter compared to last,” he added, referring to the balance between seats filled and prices.

Stephen Furlong, airline analyst at Davy stockbrokers in Dublin, said it was a good time to pick the winners -- as the competitive landscape has eased. “Airlines have left the market due to national attrition, mergers and bankruptcies, so some are very well positioned from where we are now,” he said. He added that Ryanair, which was roundly criticized for having no fuel hedging in place during the boom time for the oil price, now faced simple comparisons to beat next year -- as peak oil wiped out profits during the summer.

 

TOO SOON

But other analysts said looming recession meant the outlook for consumer and corporate demand was too risky in the current market to warrant taking a punt on airline stocks. “It’s too soon -- newsflow may remain negative over the winter months for the industry as a whole,” said Gert Zonneveld at Panmure Gordon. “In a normal market we believe easyJet (for example) will go back to the returns it was making before, 10% margins, but not for some time.”

Andrew Fitchie, transport analyst at Collins Stewart, added that airlines may be the choice target for a “short term trade”, but could be too exposed to a recession to invest in for the long term. “Shares in airlines have not soared as much as expected, but the macro scene is getting worse. Airlines are doing the right thing (by cutting capacity) but no one knows how bad it will be,” he said. (Reuters)