ANALYSIS: Reading between the lines of recent airline results

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CTAIRA analyst Chris Tarry asks if shareholders remain patient with carriers posting poor financial results and remaining focused on long-term fixes?

In an industry where any number of common events can affect an airline's performance, it seems there have been few real surprises as far as results are concerned as the June quarter comes to a close, at least in terms of direction.

However, there do appear to have been a number of cases of share price over-reactions in both directions, events that suggest there is a need, more than ever, to peer behind the headlines.

It is possible to categorise airlines across a spectrum from those that are cyclically affected to those which are structurally challenged - you can then apply a judgment to determine those that will succeed.

There are also those that have a clear view of what needs to be done and are able to put the plans in place quickly to deliver the necessary results.

However, we are seeing a worrying trend where attention is being focused on the medium and longer term, while yet more structural cost-reduction plans are being announced or are being developed.

We, and no doubt the shareholders of IAG, await the latest plan for Iberia with particular interest. Here there is a need for successful implementation and delivery, and those on the outside with an interest in following the performance must see tangible signs of improvement.

When Air France-KLM reported better-than-expected results with an operating loss for the second quarter of €66 million ($81 ­million), compared with €145 million in the same period a year earlier, on revenues of €6.5 billion, there was great excitement because most analysts had been expecting a similar outcome to last year.

This resulted in the SkyTeam carrier's share price increasing by 18% on the day after it forecast better-than-expected results for the year.

Again, there is the need for a sense of perspective at the net level, the loss in the second quarter was €895 million compared with €197 million, although €740 million of this difference was down to restructuring costs and hedging losses.

For IAG and Air France-KLM the issue is whether the plan is to get ahead of the game or get back to where they were before the last shock to the system.

In the past, we have suggested a measure of success for any business is its ability to attract "affordable capital" - clearly the cost of debt and equity for all businesses is determined by a range of factors, key among which is their financial position and likely future performance, not least their ability to generate cash.

For most, if not all airlines, not only is debt becoming more expensive and difficult to source, there also appears to be a lack of interest in the equity markets measured in terms of volume.

While this is in respect of shares already in issue, it does raise a number of questions for those airlines that are considering tapping the equity markets for funding.

If we examine the data provided by Bloomberg on airline share prices, there has been, as might be expected, a wide range of experiences.

With perfect hindsight the greatest return from investing in an airline a year ago would have come from US Airways (+100%); followed by Aer Lingus (+86.59%); Spirit (+81.52%); EasyJet (+79.47%); Virgin ­Australia (+70%); Allegiant (+66.17%); and Hawaiian (+61.76%). At the other end of the table we have Kingfisher (-72.63%); Royal Jordanian (-52.67%); Kenya (-52.65%); Flybe (-52.08%); and SAS (-46.61%). Among the others, Ryanair is +35.72% and Air China -33.7%.

All of these results can be explained by interpreting the events which affected each airline. However, the key issue is what happens - or what is expected to happen - next as it is these events from which those investing or providing finance will take their view and in this respect the outcomes are less clear, even for those where the shares have performed well during the past year. There may well be further trouble ahead and, as a consequence, the achieved changes will fall short of what is required and cost more. This time it is even more a case of "show me" rather than "trust me".

In at least two cases, recent performances have raised real questions over the benefits of cross-border consolidation and how patient shareholders will be.

The sector is already showing signs of what could be a damaging lack of interest from investors and judging by most analysts' forecasts, we have already seen a de-rating of the sector, with lower target prices being reached further into the future.

For those that have under-performed, the key issues are whether it is more of the same or what the turning point might be.

In this respect, it will inevitably be a combination of improved sentiment towards the sector and structurally better performance. In this respect, nothing really changes.