Between euphoria and calamity: when the good news is the bad news
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It is sometimes said that the only thing a company’s share price shows is what its share price is. In other words, it does not necessarily indicate the true value of the company. But, judging by the recent – and totally unprecedented – performance of major US airlines’ stock prices over the past month, either there is something seriously wrong with the share market, or with the airlines themselves. Perhaps both.
On four occasions in just over a week, the US' key air transport capability has been reduced or increased in value by 20-60% in the space of a single trading day. Billions of dollars of airline value has been added or lost in just a few hours. And Europe's major airlines, albeit better hedged and arguably still profitable, are mimicking the transatlantic performance on a smaller scale.
As can be seen from the following graph, the US gap between calamity and euphoria has steadily widened this month.
US airlines' share price price daily movement (close vs prev close):
02-Jul-08 to 24-Jul-08
Source: Centre for Asia Pacific Aviation & Yahoo Financial
On 22 July, the euphoria focused on lower oil prices and the prospect of airline consolidation (in practical terms at least), as Lufthansa, United and Continental put forward their Star Alliance proposal to the US DoT. The next day's calamity was a slight rise in oil prices, and another fit of paranoia about a slowing economy. But the (erratic) trend appears to be upwards.
The prospect of enhanced competitiveness and reduced competition associated with a close alliance is inevitably good news for an airline - as is a reduced oil price. An earlier Europe Airline Daily perspective has illustrated the exaggerated inverse correlation between oil prices and US airline share prices.
But there is also a slowly evolving - and quite logical - correlation between consumer sentiment and the price of oil. As the sentiment worsens and spending slows, the price comes down. Good news. Well, for the cost side of the ledger, anyway. But not so good for airline revenues.
European airlines' share price daily movement (close vs prev close):
02-Jul-08 to 24-Jul-08
Source: Centre for Asia Pacific Aviation & Yahoo Finance
The roller coaster is not as steep in Europe, but airline share price movements are well outstripping wider market moves, with British Airways yesterday losing 7.6% of capital value on the day, for no particular reason, except perhaps a more negative perception as oneworld appears to lag the field in its coordination moves.
But around the corner possibly looms the good news of lower oil prices. And probably the bad news of lower oil prices, as they respond to slipping economic confidence and as demand drops.