There will be a bounce

Dino D'Amore
By Dino D'Amore June 28, 2016 20:07

There will be a bounce

There really is only one thing to lead with today – buy Ryanair, easyJet and IAG shares! EasyJet stock closed down 22.32% yesterday on top of significant losses from Friday, Ryanair shares were not far behind. The market is trying to find the new level for both the pound and UK company shares and things will eventually steady but in all that there is no doubt at all that there will be a bounce for both Ryanair, IAG and easyJet. easyJet was, and remains, the airline in Europe most exposed to Brexit, but IAG is only partially exposed at most. IAG is parent to Iberia, Vueling, Aer Lingus and British Airways. The latter is second in terms of margin to Vueling, which really drives the profits at IAG of late. So, as mentioned last week, IAG can weather the current Brexit storm. Ryanair on the other hand has been hit very hard but this airline is able to and in fact has announced that it is to divert expansion to other areas of Europe away from the UK while uncertainty continues and as such the downside for Ryanair remains not so much Brexit but more so French ATC strikes and terrorist action. As things stand today, the UK is facing the real prospect of witnessing a breakaway Labour parliamentary party standing at a general UK election on the ticket of a repeal of the vote in favour of Brexit. The UK parliament has yet to pass a vote to enact Article 50 for the UK to begin the process of breaking away from the EU and 72% of those same MPs are in favour of the UK staying in the EU. The question being posed is whether those MPs would vote to press the final plunger to leave the EU against their known principles? It is unlikely. Of course the UK would not be the first EU country to have a vote on EU matters go the wrong way only to reverse it later. Ireland has been there and done that already. But UK airlines need to remain part of the single European sky and this is the risk the markets are most worried about and until that question is answered once and for all easyjet shares will remain depressed.
Obviously, there have been copies and followers, but we here at Airline Economics were first to come down and state (many times) that a Brexit is a licence for the UK to attack the Irish lead in aircraft leasing by matching or bettering its taxation regime and that is an upside for the UK.
I might well be very wrong indeed, but logic does suggest that the selloff has gone a bit too far. After all, can the Germans and the French really lose a trading partner with a £68bn trade deficit with the EU? The Germans and the French can talk down the UK’s chances of a trade deal in public to stop other EU member states from running to the exit door but in reality will they risk losing the largest market for German and French manufactured goods? No, they will try to ram their message home to other EU states while burying reality behind reciprocal tariffs, which will keep the status quo but look to many as though the UK is being battered for leaving the EU. In that event the UK could well become better off than it was inside the EU. Alternatively, and most logical the UK government of the near future could well take the course that should have been taken in the first instance – The UK extracts from the EU complete terms for departure and then takes those terms to the UK electorate in a 2nd referendum which will either evoke article 50 and leave on the basis of those terms or vote to remain in the EU in full. We shall see – there are too many unknowns at the moment. The impact on capital market appetite for risk is a distinct worry and as such a fair few deals will be delayed, and those IPOs that are too far along the road to be delayed will do well to go off well. Investors are already looking at lessors with significant exposure to Western Europe.
Dino D'Amore
By Dino D'Amore June 28, 2016 20:07