Airlines still soaring despite bad news and cost-cutting
ON THE face of it, 2009 was never going to be a good year for airlines. The cost of oil – the main source of fuel for aeroplanes – has been steadily rising since February and is now nearing $75 per barrel. The recession meant that people were more inclined to stay at home rather than fly to exotic destinations. And then the swine flu outbreak depressed demand even further.
You might be tempted to run a mile from airlines. You would be wrong. While they have certainly not escaped unscathed from the crisis, London-listed airlines have not done as badly as feared and are still providing interesting trading opportunities for contracts for difference (CFDs) traders.
British Airways’ (BA) share price has risen 33 per cent since March, while Easyjet has risen 16 per cent over the same period although its stock has been extremely volatile. And figures released yesterday by airport operator BAA – which runs seven UK airports including Heathrow – suggested resilience in passenger demand. UK passenger traffic fell 2.4 per cent in July on the previous year but this was substantially better than the 5.9 per cent fall seen in June and passenger traffic at Heathrow inched 0.9 per cent higher last month.
Citigroup analysts Andrew Light and Roger Elliott say that British Airways, Easyjet and Ryanair (the latter is listed in Ireland) all saw better-than-expected passenger traffic in July. In the case of BA, though, that might not be as great as it sounds – they warn that “much of the July premium traffic tends to be leisure traffic using promotions and redeeming frequent flier miles”. Nonetheless, BA remains their pick of the European airlines along with Germany’s Lufthansa.
It appears that the rising oil price is not troubling the sector too much either. While a surge in oil will clearly have a knock-on effect, it will not be an immediate one. Jet fuel is the biggest cost for budget carriers and for traditional airlines it usually ranks as the second-largest expenditure, behind wages. So after oil recorded historic highs last summer, airlines learned their lesson and became more assiduous about hedging against sharp rises in the oil price using forward contracts.
European airlines have stepped up their hedging in the last quarter in an attempt to stabilise costs. For example, Ryanair has hedged up to 90 per cent of its fuel needs for the remainder of 2009 in the hope that it will cut expenses by €460m over the fiscal year. However, hedging is a double-edged sword, as CFD traders know all too well. Even when fuel prices are falling, they can still be detrimental to carriers, which can lose money on useless hedges.
The most obvious stock for CFD traders is British Airways, which has been enjoying a good run in line with the rest of the FTSE 100 index. However, it is nearing a key area, says Alastair McCaig, senior derivatives broker at CFD-provider WorldSpreads.
PREVIOUS HIGHS
BA is looking to test previous highs at the 175p-185p level that it reached in late April and December last year. If the stock can break through that resistance level, then the market would be eyeing the 230p mark – a huge gap to be filled, says McCaig.
He suggests that if you are already long of BA then you are best off staying in your position and perhaps implementing a trailing stop – where your stop loss tracks the price higher – to lock in a percentage of your profits. You may want to take your profits off the table and reassess the market. If it breaks through then you can always re-enter the market.
Otherwise, those not already holding a position in BA ought to either wait until it either breaks through and spikes upwards, or retraces from the resistance level and opens up the opportunity to buy on the dip.
Easyjet is also nearing a key resistance level on the six to 12 month chart at the 330p-345p mark. If it successfully breaks through then the market will be targeting 400p-410p with stops placed fairly close at about 315p-320p.
While carriers are perhaps not the most obvious choice for CFD trading, analysts are still relatively positive about their ability to continue to attract passengers in a post-recession environment. And if both British Airways and Easyjet can break through key chart levels, then there could well be further upside to come for the stock and your profits could start to soar.