The Notebook: Falling fares spell trouble for airlines while Big Tech set for monster quarter
Where the City’s movers and shakers get a few things off their chest. Today, it’s Victoria Scholar, head of investment at Interactive Investor, with the pen, talking airline stocks, Big Tech earnings season and her summer listening picks
Turbulence at Ryanair, BA and Easyjet
Airline stocks are having a turbulent time. Just on Monday, shares in Ryanair plunged by as much as 15 per cent dragging Wizz Air, British Airways’ parent company IAG and Easyjet down with it. The low-cost carrier reported a 46 per cent slide in profit after tax to €360m in the first quarter, sharply below forecasts for a figure above €530m. Average fares in the three months to the end of June were down by 15 per cent and revenue per passenger fell by 10 per cent. CEO Michael O’Leary warned that second quarter fares would be materially lower than last summer’s fares. This resulted in Ryanair facing a series of price target cuts from the likes of Barclays, JP Morgan, HSBC and Citigroup yesterday.
But Ryanair certainly isn’t the only airline to be going through a difficult period. Deutsche Lufthansa issued a profit warning for the second quarter earlier this month and cut its 2024 earnings guidance for a second time. The airline said it was particularly affected by “the challenges posed by the negative market trend”. And Air France-KLM said it was struggling with disappointing traffic to and from Paris which was “lagging behind other major European cities” ahead of the Olympic Games. Travellers have been avoiding the French capital in the run up to the event, potentially because of the perceived higher cost, and “postponing their holidays” until after the event or switching to other destinations instead.
Crossing the Atlantic, Delta Airlines and United Airlines are also facing headwinds; both American airlines recently forecast lower-than-expected current quarter earnings.
The post-pandemic release of pent-up demand for air travel has tapered off and airlines are losing their pricing power. Pressures from the cost of living crisis and high labour and operating costs are starting to bite. Airlines are grappling with weak revenue per passenger amid excess seat capacity and falling ticket prices. Plus last week’s major global IT outage certainly didn’t help either with thousands of flight cancellations and delays globally.
Consequently, stocks in the sector have been underperforming this year with Ryanair, Easyjet and Wizz Air nursing painful losses.
Monster quarter for Big Tech…
Big Tech earnings season, which is currently underway, could provide a boost to equity markets, according to Bloomberg’s Market Live Pulse survey. This week in the United States, second quarter tech sector results are due from Alphabet, Tesla and IBM. Next week, we hear from Microsoft, Meta, Apple, Amazon and Airbnb. Nearly two thirds of Bloomberg’s 463 survey respondents said they expect earnings to boost the US equities benchmark as optimism picks up. Andrew Tyler, head of US market intelligence at JP Morgan, said it could be “another monster quarter”.
…as small businesses struggle
According to new figures from Begbies Traynor, there has been a 10 per cent surge in UK businesses facing “significant” financial distress. Businesses have been struggling with more expensive debt on the back of higher interest rates and weaker consumer spending amid cost of living pressures. The insolvency practitioner said the number of companies dealing with significant distress increased from 554,554 in the first quarter to 601,950 in the second quarter. That figure has surged by nearly 37 per cent versus the same period last year.
Espresso shot
Shares in Starbucks closed higher by nearly seven per cent on Friday on the back of media reports that major activist investor Elliott Investment Management is building a sizeable stake in the coffee chain. According to the Wall Street Journal, Elliott is looking for ways to improve Starbucks’ struggling performance. In April it announced weak quarterly results – Starbucks cut its 2024 outlook and reported US same-store sales down three per cent and traffic down seven per cent. This has put pressure on its CEO Laxman Narasimhan to look for ways to improve the business.
Quote of the week
This “is a very big weak for earnings reports and earnings results and I think that could very well be the catalyst to get this market rally going again”.
Amanda Agati, CIO, PNC Financial Services
Summer reading (and listening)
It is the time of year when summer reading lists are put together, but when compiling my own I also make time for podcasts. For those looking for a weekly bitesize show that tackles the latest investment trends look no further than Interactive Investor’s On The Money podcast.
In a recent episode host Kyle Caldwell looked back at the key events that influenced stock markets in the second quarter, including discussing the best-performing funds and the pick-up in investment trust consolidation. In the latest episode, the focus was on the investment prospects for China, a major stock market that’s had a tough couple of years. Kyle put the questions to Xiaolin Chen, head of international at Krane Shares, a provider of exchange-traded funds (ETFs). The weekly podcast is published every Thursday and is available on all the major podcast apps, including Spotify.