Checkout Allegiant Travel Company, its stock has surged another 12.7% in the past few weeks but it is still trading at an impressive forward earnings ratio of 16.7 – Those who followed Allegiant as one of our pick investments of 2013 in January will be doing nicely right now but will still be some way off our late 2011 call to invest in Easyjet and Spirit. Even so we do see Allegiant as one of the safer bets of the past few years, to the credit of their management. Allegiant senior staff are attending and speaking at Airline Economics Dublin (www.aedublin.com) in January 2014 and it will be well worth taking the time to stop and listen to how this small airline (by comparison to some) is managing itself. I can think of a fair few airline management that should be dragged into the room and strapped to the chairs to get some tips on getting the balance right.
Also picked out by Airline Economics at the turn of the year was the return of the fuel hedge because of FX movements. We followed this up in March when the Indian rupee’s fall gathered pace and stated that the Indian carriers will be hedging soon. Now there is news that Air India plans to hedge jet fuel for the first time in five years because of the continuing fall of the rupee.
The airline has decided to start locking in fuel prices once Brent crude falls below $100 a barrel although it is highly likely that it will have to settle just above this mark if it is doing a deal before July end. Air India might be better off going for a mixed bag of hedges including currency hedges (see Airline Economics issue 14 for some detailed information on these matters www.airlineeconmics.co ).
The rupee has fallen 8.6% in the last quarter with current one-month implied volatility up 452 basis points in the same period. So for the Indian market higher fares are being offset by FX losses. It is likely that the AirAsia venture will decrease fares across India in the short term and thus the Indian market remains a mixed bag at best in the short term. Even so it is worth watching out for AirAsia which has just 35% of its fuel needs hedged as of March 31, and Singapore Airlines, which has 57% of its fuel hedged. These figures are way below the current market average of 66%. Ryanair has 90% hedged at this time, which is the highest, although its record to date on fuel hedging is poor to say the least. Recent history is nothing to go by in this market but one cannot help but feel that SIA and AirAsia have both tried to run a low-risk hedging strategy that may in the final analysis turn out to have been folly if oil prices do not fall back soon.
Meanwhile the attorney general of Texas along with a those in 19 other states have banded together to join the US Department of Justice review of the merger between American Airlines and US Airways. We have already given you the detail on this review last month but this news compounds thoughts that the merger process may not be as clear cut as we would have hoped just a few months ago. It is likely that each state will now be looking for detail about plans for the future at airfields in their own back yards – the eventual merger cost to AA/US is now increasing.
AA/US merger comes under attack; Allegiant looks very nice; Air India looks to hedge
