Idea of the Day: IAG’s time to shine, as it outperforms low cost rivals

The collapse of Monarch airlines on Sunday night saw a strong rally in other UK carriers such as IAG, Easyjet and even Ryanair, itself beleaguered by its recent cancellation of thousands of flights. The British airline industry has been hit by two major events in as many weeks, and it could impact share price dynamics as we lead up to the end of the year.

What: the collapse of Monarch airlines on Sunday night saw a strong rally in other UK carriers such as IAG, Easyjet and even Ryanair, itself beleaguered by its recent cancellation of thousands of flights. The British airline industry has been hit by two major events in as many weeks, and it could impact share price dynamics as we lead up to the end of the year.

How: While we still think that Ryanair will remain profitable, its reputation for reliability has been hurt, which could boost Easyjet’s performance vs. Ryanair for the next few months. However, the Ryanair saga, which hinges on the fact that there have been mass resignations of pilots choosing to move to other airlines where they are given better working conditions, highlights a serious problem for the low-cost short haul airlines: their cost base is likely to rise sharply as pilots and other staff demand higher salaries.

This is not only a problem for Ryanair, higher costs are likely to seep across the low cost sector, which could eat into profits for the long term and ultimately weigh on the share price of its rivals such as Easyjet. This is why higher cost, frillier airlines such as IAG (parent company of British Airways and Iberia), are outperforming the lower cost carriers, as you can see below. Whereas IAG has had years to implement efficiencies to cut costs and maintain profitability, this is a new era of higher costs for the low cost airlines. Thus, after underperforming the low cost airlines in the first half of the year, we expect IAG to continue its outperformance of Easyjet and Ryanair for the foreseeable future. This is why a relative value trade of higher cost airlines vs. low cost airlines, is one to watch this autumn.

Chart 1: IAG, Easyjet, Ryanair daily chart normalised to show how they move together 


Source: City Index and Bloomberg 

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.