Take off in the blue with aviation equity growth

WITH tour operators struggling, strikes looming and the spectre of wildcard events like May’s volcanic ash cloud, contracts for difference (CFD) traders might be justifiably nervous about the aviation industry. But this caution flies in the face of the figures: globally, the sector is growing at a healthy pace and even the major European carriers beat market expectations with their second quarter results. And the signs are that passenger numbers – including the most profitable business and premium travellers – are on the up.

In line with their consensus-beating results, European airlines have also delivered decent share price appreciation in the last six weeks, with British Airways – UBS’s most favoured European aviation stock – delivering a 15.4 per cent rise from 10 July to 10 August and Air France-KLM rising 14.7 per cent over the same period. Although Europe lags behind many of its emerging market rivals in terms of recovery speed, the undervaluation of European airline stocks can give a picky trader good returns and solid dividend yields over the medium term – if you are prepared to sort the wheat from the chaff.

The strength of the recovery in the aviation industry has surprised many analysts. Although the ash cloud in April-May has cut into European airlines’ profits, a savvy trader who bought in May when stocks were at their lowest would today have made 16.8 per cent on BA, 18.6 per cent on Lufthansa and 24.8 per cent on Iberia. but these figures show how much timing matters: unless traders are in for long-haul returns, they are best off targeting medium-term appreciation among European airline stocks by buying during a crisis and selling after a couple of months as the stocks return to levels that reflect their steady recovery.

It pays to be wary, however. easyJet has bucked the trend of recovering stocks. Plagued by problems over punctuality and a row between brand-owner Sir Stelios and the easyJet board, its stock has sunk even below its May lows. On the other hand, traders can also access aviation growth by targeting air industry service equities like BBA. The stock is recommended as a “buy” by RBS’s Joe Spooner and analysts at Charles Stanley, with both forecasting a strong and steady recovery.

For those traders who are bullish on the global recovery, it makes a lot of sense to target emerging market airline stocks. Data collected by the International Air Transport Association (IATA) – a trade body of 230 airlines – shows that growth is concentrated in the Middle East and Pacific Asia. IATA forecasts a net profit of $2.2bn for Asian carriers this year, the largest profit of any region. Compared to last year, passenger numbers have swelled 10 per cent for the north and mid Pacific, 14 per cent for within-Asia flights and an impressive 22 per cent for flights between Asia and the Middle East.

Firms such as Cathay Pacific and Singpore Airlines are enjoying the benefits of this expansion, with both stocks having appreciated steadily since the start of 2010.

And premium passengers – that is, those not travelling economy – are returning to the
skies in line with world trade (see chart): the most recent figures available show that at the beginning of 2010 their numbers were up 10 per cent on 2009.

All of which means that whether traders are after medium-term, opportunistic buys or long-run, high-return growth, there’s an aviation stock to fit your needs.

All of which means that whether traders are after medium-term opportunistic buying or
long-run high-return growth based on emerging market strength, it pays to consider the aviation industry.