The peak of the run, an IPO and a hammer blow from the EC

Dino D'Amore
By Dino D'Amore November 7, 2013 12:56

The peak of the run, an IPO and a hammer blow from the EC

EasyJet posted a 5.4% rise in traffic to 5.5m passengers in October 2013 for the last month, prompting relieved investors to send its shares up 0.9 per cent yesterday. In the year to October, easyJet was up 4% year on year at 61m passengers. However, what we have to remember is that easyJet shares are at this time riding high and are now somewhat overweight, after all they are now trading on a 2013 earnings multiple of 13.4 times – that is steep at 2.4 times the net asset value for the shares. Even if easyJet comes in on its forecast of £460m pre-tax profit shares will still be on a multiple of 12 times. In addition growth is slowing, although the current traffic figures are polluted by French and Italian air traffic strikes, but the main concern now is that the period of Ryanair kicking it back with the cocktails is over and it is going to start fighting back. And as it does, one would expect the Irish to expose easyJet’s pricing as both airlines get back on par on a service front. Even so it is without question that easyJet continues to win market share from the likes of Ryanair as shown in the comparable grow figures of 4% against Ryanair’s 2%. As we mentioned in late August, easyJet is at its peak share price by the looks of things.

Meanwhile, staying on the subject of airline shares; yesterday saw the float of Avianca. The IPO for Avianca Holdings opened for trading at $14 and rose to $14.40 after pricing the 27.234m shares at $15, well below the expected $17-$20 range. Even so both JP Morgan and Citigroup did a great job getting this IPO off of the ground in New York. Avianca-Taca is of course a very impressive outfit these days and the company has no real relation other than in name from the airline disaster of some 30-40 odd years ago. Now Avianca-Taca looks more and more like the fittest airline in Latin America with some good capacity management seen over the past few years putting it in a strong position.

Meanwhile the European Commission (EC) has finally given in to pressure and launched an in-depth investigation into whether the Polish government violated competition rules when some €200m flowed into Lot Polish Airlines. This is a big deal. If it wanted to, the EC could find LOT to be guilty of receiving state aid in five minutes flat. The crunch point comes with the question – would the carrier have survived intact without need to strongly cutback on capacity without the state aid? The clear answer is no.

So Boeing, lessors and all other stakeholders will be wondering if the EC will indeed force a sale of LOT by barring it from further aid and send it down the drain as it did with Malev. If it does then Aeroflot will be most interested indeed and this will represent a bargain against the price that will be sought if restructuring continues to fruition. LOT represents the key into the EU that Aeroflot has been seeking. That is all of course the extreme scenario based upon the EU getting its figures out on state aid distorting the airline market. Of course Ryanair and easyJet made very good headway out of the Malev collapse and it is certain that the vultures will be circling the exciting prizes that could wait within the Polish market. Everyone will watch this particular EC investigation with great interest I am sure.

Dino D'Amore
By Dino D'Amore November 7, 2013 12:56
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