A quick review of the European airline industry

The European airline sector was one of our top picks towards the end of 2014 when declining oil prices and a depreciating Euro provided significant tailwinds. A glimpse of a European recovery and Quantitative easing in the first months of 2015 added to the positive momentum. In this environment the MSCI European Airline Index added 45 percent between the end of September 2014 and the end of March 2015.

Unfortunately the European airline industry is still led by legacy carriers that often have been burdened by uncompetitive political decisions and excessive unionization. This became evident at AirFrance and Lufthansa where the improving cost environment only led to an increase in industrial action by pilots and staff.

Thus for investors in airline companies, it may be time to take profits as the probability of further upside will be dampened by a rebound in oil prices, a stronger Euro and higher costs.

Alternatively, investors wishing to stay in the sector may consider one the emerging companies in the sector. Low cost airlines, as they or normally referred to, have managed to maintain efficient operations while aggressively capturing market share from the big boys. In this investment space easyJet appears particularly attractive following a 9.3 percent correction at the time of writing.

easyJet reported revenues for the six months ending on the 31st of March of £1.7 million, in-line with our expectations. For the first time ever EasyJet recorded a profit before tax in the winter season.

Despite these positive results the share price dropped by as much as 9.7% on the day. Walk-outs by French air traffic controllers have caused the cancellation of more than 600 flights in April, costing the company £25 million. The threat of further strikes and the impact of the Germanwings plane crash continue to weigh on bookings in the second quarter.

At first glance, these factors appear to be temporary. easyJet continues to target market share from the big carriers while and increase in airport charges will be mitigated through an increase in seating capacity in 2016 and lower fuel costs. The current quarter of 2015 is therefore expected to be weak, however, easyJet is positioned for a recovery in the summer months as a European expansion in short-haul capacity continues.

Investors in this sector should be aware that the airline sectors is generally riskier than other equity sectors as is it highly sensitive to commodity prices, economic variables and geopolitical events.