FTSE 350 airlines: Low cost gets expensive

British Airways owner, IAG, spent 2012 wrestling with its lossmaking Spanish budget airline Iberia. By November, chief executive Willie Walsh had lost patience with Spanish unions and published a document outlining a radical overhaul of the underperforming carrier. No wonder: in nine months it lost €262m (£213m), almost cancelling out profits at BA.

If Spanish pilots reject proposals to axe up to 4,500 staff – a fifth of Iberia’s workforce – slash wages, sell planes and chop routes by 31 January, cuts could be far worse. Nothing is on the table, but talks are under way. Turning this down could cost the Spanish economy even more jobs, so politicians will surely make it happen. Either way, Mr Walsh aims to have stemmed Iberia’s cash losses by mid-2013 and a €600m turnaround in profitability. That’s ambitious.

Clearly, IAG has its plate full, so consolidation plans have taken a back seat. True, it’s buying the rest of Spain’s Vueling, but the serious deals are going on elsewhere. Delta’s 49 per cent stake in Virgin Atlantic should get regulatory approval toward the end of the year. BA’s business class operation faces serious competition when it does.

Rivals pose little threat to easyJet just now. The company upgraded profit forecasts three times in 2012 and doubled the dividend. Legacy carriers – Air France is the latest – are discounting heavily, but others are either going bust, or slashing capacity, handing the no-frills carrier further market share.

Passenger growth and higher average fares helped offset a big fuel bill and other costs. In December alone, over 4.3m customers bought easyJet’s cheap flights to Europe, up nearly 5 per cent on last year and more than expected. A new TV advert, strong start to the ski season and clever use of its planes meant jets were much fuller than normal, too.

There’s little doubt easyJet will profit from a more stable global economy, but winter weather could still cause turbulence and both taxes and airport charges are ballooning. But valuation is our key concern with the company. Growth will be less impressive in 2013, yet the shares currently trade on 12 times earnings estimates and at a premium of more than 43 per cent to the 200-day moving average. In the past, similarly overbought conditions have always suffered a correction.