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Airlines fly over the snow

The headlines were rough on airline companies last year. Each quarter seemed to bring new travails - first snow and ice, then an Icelandic volcano, followed promptly by air traffic control strikes and finally snow and ice again. Each upset was costly; with a high fixed-cost base, the airline industry haemorrhages profits when planes can't fly. And that doesn't include the reputational damage it suffers when images of customers camping out in Heathrow are broadcast across the world.

Yet for all these problems, shares in the UK's two FTSE 350 airline companies, British Airways (BA) and easyJet, fared relatively well. That's mainly because investors looked past the headlines to the encouraging business environment. With both output and employment rising last year, airlines posted a recovery in sales. And thanks to that high fixed-cost base, an uplift in sales meant a leap in profits.

This was most apparent at BA, which is particularly economically sensitive because of its bias towards business passengers and transatlantic routes. The beleaguered flag-carrier swung back into the black for the six months to 30 September, as almost all of its 8.4 per cent gain in revenues dropped to the bottom line.

The revenue increase was entirely achieved by raising ticket prices; BA's capacity actually fell over the period. European flag-carriers have been understandable cautious about expanding into the recovery after a decade in which their pricing power has been progressively eroded by the aggressive expansion of low-cost players like easyJet.

The budget airline has continued to open routes, increasing capacity by 6 per cent for the year to 30 September 2010. Keeping prices relatively low allowed it to fill all those extra seats as demand returned, and revenues finished the financial year up 11.5 per cent. Such figures suggest passengers - even business flyers - continue to trade down from BA to the likes of easyJet.

These economic and industry trends should continue into 2011. But each of the UK-listed airlines also has issues of its own that may drive share prices, for better or worse. Investors are clearly expecting high things of BA's complex merger with Iberia - an ongoing project that may generate positive news flow this year - but its differences with the cabin-crew branch of the union Unite still haven't been settled.

easyJet had its fair share of internal problems too, ranging from a spat with its founder Sir Stelios Haji-Ioannou about dividends to chronic delays at Gatwick in the summer. The first issue has been resolved: new chief executive Carolyn McCall has promised Sir Stelios and other shareholders a cash payout this year. But the second problem is more serious, and we will only know if it has been resolved when the peak holiday season returns.

COMPANYPRICE (p)MARKET CAP (£m)PE RATIOYIELD (%)1 YEAR PRICE CHANGE (%)LAST IC VIEW
BRITISH AIRWAYS3003,4550.055.5
EASYJET4571,96716.10.028.4

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