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Weekly Review: Why is it a bad summer for airlines?

Ben Weiss, Friday, 9 August 2019

Airlines sunburnt

In the UK, we’re used to summers that are 95% cloudy, raining and/or only mildly warm. Every year it reaches September and we are still waiting for summer to arrive. But not last year. For 2018 was a glorious exception where temperatures seemed to not fall below 25 degrees and people began to forget what clouds were. This summer may not have been as great, but the consequences of last year’s lengthy heatwave are being felt in the aviation and travel industry today.

Airlines sunburnt from last year’s heat

Sales for major airlines and travel companies were impacted massively last year, as people were choosing to enjoy the domestic weather while saving money by not travelling abroad.

Summer is the golden period for any firm in the travel industry. Millions of holiday-goers flock to Europe where sun and hot weather is almost guaranteed at reasonable prices. What’s more, there’s no agonising 10-hour flight - most of mainland Europe is accessible in three hours. The main reason these are taken is for sun-deprived Brits to be able experience the heat, but the extended heatwave of 2018 meant those in the UK were already experiencing the Mediterranean climate.

This is certainly one contributing factor to Thomas Cook’s enormous downfall, but IAG (BA’s owner) and Ryanair, among others, are now also feeling the brunt of it. IAG saw profits fall 60% while Ryanair’s fell 29%  WOW Air and Flybmi are two large names in aviation that have gone As the demand for travel is decreasing (or at least decreased significantly last summer), prices of tickets also fall as airlines try to entice sales. However, every drop in price cuts into profits, so airlines are facing a catch 22 situation where they must cut prices to stay competitive but can’t cut prices if they want to stay profitable. Furthermore, a rise in fuel costs is doing nothing to help profits, and Brexit uncertainty has also made it difficult for airlines to look plan for the future.

These companies will be key to watch as summer draws to a close and earnings reports for the last half of the year are released. The less-than-impressive summer this year might prove to be the industry’s salvation.

China’s (‘non’) retaliation

Last week we wrote about the intensification of the trade war, as Donald Trump announced new tariffs on Chinese goods. This week, China choose to retaliate by what Trump called as manipulating currency, China did not retaliate… despite the yuan just so happening to fall to new 11-year lows.

USDCNH Monthly chart
TraderPro screenshot.

Trump was swift to point a unapproving finger, taking to Twitter (where else) to accuse China of currency manipulation. China strenuously denied the allegations. Currency manipulation is the act of intentionally devaluing a currency to make it more desirable to trade with – an act that often sees domestic consumption rise as well.

For example, let’s say the yuan and dollar were at parity with one another, i.e. $1 is worth ¥1 (yuan). If the yuan is then devalued, meaning it’s worth (say) half of what the dollar is worth, this makes the dollar twice as more valuable than the yuan. Purchasing power of the dollar then increases when buying Chinese products, as it’s now worth double the amount of yuan it was previously. So why would somebody pay for a product in the US if they can get twice as much value for the same product in China?

Currency manipulation is illegal in most cases, but proving it was done intentionally and actually penalising the perpetrator is almost impossible.

This move is the latest in a long, long line of eventful moments in a trade war that shows no sign of coming to an amicable conclusion soon. Again, it’s worth continuing to oversee any new developments in this as it can have a serious impact on the markets.

Home Alone to be Disney’s savour?

Disney shares fell this week, despite releasing blockbusters such as Avengers: End Game and Toy Story 4. Revenue and profits rose, but failings in X-Men: Dark Phoenix, which was expected to perform a lot better than the $52 million profit it earned, meant the production company missed estimates by $1.2 billion.

For Q3, Disney should enjoy a healthy return from Lion King, but it’s now looking further afield for redemption. A Home Alone remake has been announced, which surely won’t live up to the high expectations of the original but might generate the revenue on hype alone.

Disney has released five of the largest six movies of 2019, so the company is doing something right. A low price and successful line of hits seems like a recipe for profit, but of course, as we’ve seen here a fall in share price is only a poor-performing movie away.

Disney is another one to watch over the coming months.

Walt Disney August
TraderPro screenshot.

 

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