Lufthansa shares fell by 11.5% this morning at the open after the German flag carrier lowered its profit outlook for 2019 from €2.4-3bn to €2-2.4bn, citing price competition from low-cost rivals. In a statement, Lufthansa said: “Yields in the European short-haul market, in particular in the group’s home markets, Germany and Austria, are affected by sustained overcapacities caused by carriers willing to accept significant losses to expand their market share.”
This is pressure on the Eurowings low-cost arm of Lufthansa, which is being put into retreat by the likes of Ryanair, easyJet, Wizz Air and Norwegian; in the same manner that AirBerlin and Germania were previously.
Indeed, when Ryanair announced that its margin was down by 29% a month or so ago the market should have priced-in the fact that if it is down then every other airline around it will be down. However, it seems most algorithms are slightly misplaced and out of date, choosing to have the European flag carriers as their bellwethers when in Europe at least, when Ryanair is coughing, you can bet all other airlines already have a cold.
Easyjet was trading down today by 3.2% and IAG down by 2.7% at one point with Ryanair down some 4%. Surely if Ryanair competitors are feeling the heat then Ryanair shares should be moving up – there seems to be good value in airline shares across Europe today.
The real demon on the horizon remains Jet-A refining capacity. The market seems to have pushed the looming risk of the IMO2020 global sulphur cap, which will force the majority of the global shipping fleet to switch to use of marine gas oil at the end of this year, way to the back of the priority list. Once IMO202 comes into force, some two million barrels of consumption per day by shipping will switch to refined gas oil, which requires increased use of naphtha/kerosene in fuel oil blending.
That is a huge swathe of global refining capacity and naphtha/kerosene now taken-up by shipping at the expense of other fuel types such as heating oil and Jet-A. This should lead to car fuel, heating oil and Jet-A prices skyrocketing from 2020, because refining capacity across the globe has not increased sufficiently to deal with this looming problem. Indeed, at this time no one can hedge beyond 2020 in any meaningful manner since it was announced that merely expanding hydro-desulfurisation capacity in the refining system will not be enough to meet the new targets.
Add into this mix a bunch of nutcases putting limpet mines onto tankers in the Gulf of Hormuz and you have a toxic mix. Airlines will be hit very hard indeed – all save for Delta which will be slightly insulated due to its refinery, but remember it too still need to source Kerosene for refining, which is now going to be in short supply from the end of this year as the full weight of shipping consumption becomes clear for all to see. Either way Delta will have an edge over competitors and going long on Delta might be a wise move in the here and now.
How many airlines are ready to take onboard a clear hit from IMO 2020 related fuel cost increases? Very few are in a good position outside of the US market, but I would argue that the news from Lufthansa about the pressure on Eurowings is nothing if not good news for Ryanair, Easyjet and Wizz as they need to drive out competitors fast in order to increase prices down the line to subsidise fuel price increases. So right now things do seem to be moving forward to the overall benefit of Ryanair and Easyjet over the mid-term at least.
The mighty IAG also seems to be in a very strong position across the board at the expense of its competitors, and that leads us to one very important final point – IAG avoids competing with Ryanair directly where possible – Lufthansa has been fighting them head-on with Eurowings – and that is why Lufthansa and IAG are where they are today.
Meanwhile in Paris the Goldilocks aircraft has arrived.
The Paris Air Show began this morning with the launch of the Airbus A321XLR. The aircraft is not too big, it is not too small, It is just right for so very many segments in the airline market right now. The aircraft should do very well indeed and even if it does not blow the roof off of air shows in the future with thousands of orders then we can bank on the fact that this aircraft should carry a lease rate premium well into the future, being as it is an aircraft in a mass market segment with no real competitor. It might put pressure on aircraft slightly smaller and slightly larger aircraft offerings in the Airbus range though, but that is worth the risk.
The A321XLR has 4,700nm range and is said to bring 30% lower fuel burn per seat than previous-generation aircraft. The aircraft is also a fleet manager’s dream since it combines single-aisle economics with long-haul widebody cabin comfort, thus making the aircraft easy to fill as the market continues to downsize in favour of frequency — something that may be curbed in the future, maybe within a decade, by environmental taxation, which will turn the market on its head in the 2030s. But the more things change the more they stay the same – Air Lease Corp was the launch customer for the A320XLR with 27 orders.
Airbus has launched the very aircraft type that Boeing desperately wanted to bring to market via the NMA. Boeing cannot launch a new type while they have the MAX on the ground and while the 787 is causing so many headaches, with further delays to deliveries with RR engines on wing announced this quarter.
Indeed Tewolde Gebremariam, the CEO of Ethiopian Airlines, made very sure this weekend that Boeing could not put the MAX issue to one side for this week when he arranged a round of interviews with the global press broadsiding the Boeing senior management for stating that if US pilots were in the cockpit the crash would not have occurred. Boeing senior management would do well to sit down with airlines at the show and not conduct too many press conferences. They certainly cannot make any big splashes without looking slightly out of touch.
The Air Lease Corp order this morning showed a flight to quality with in addition to the A321XLR 27 some 50 A220-300s and 23 A321neos were ordered. Both aircraft are unquestionably two of the very best aircraft in service anywhere in the world at this moment, both of which are sought after by airlines.
There is no question that this is an Airbus rally today and this is a fine set of orders so far in a tough market.