It is the end of the quarter and the decks are clearing before the summer break period(s) with people moving and deals closing. So as deals close or, as is the case with some, get delayed or shelved, it is worth having a quick look around the market.
It will begin and end with Chinese economic data – Chinese manufacturing output remains flat with a slight contraction while three separate sources put SME companies firmly in recession. Also a report from the Chinese government showed the manufacturing Purchasing Managers’ Index (PMI) dropped to 50.1 from 50.8 in May, this figure is likely to be below 50 points in truth. It is likely that the Chinese slowdown is filtering through the APAC region at pace now. The effect on Australian markets is already being felt and the huge ramp-up in airline capacity between China and Australia will now be put to the test over the next few months. Keep an eye on passenger and cargo load figures. The latter is likely to take a significant hit but many eyes will be on business travel demand.
There was interesting news coming out of France last week as the government announced that it was revising its high speed rail investment program from €280bn over 20 years on 28 lines to €30bn. This news puts French high speed rail in a holding pattern for at least a decade, it is a required measure given that French finances are in a terrible state and one we have seen before – This is what the UK did in its deep recession of the 1970s. For the UK it ushered-in 20 years of crumbling rail networks, which led to privatization and only then lead to a complete return to track investment after a terrible fatal crash. The difference for France right now is that its high speed rail network is €32bn in debt with national and local government throwing in €12.5bn per annum in subsidies just to keep it running that have to now come to an end.
As the French train network slows through fewer trains per hour and reduced speed limits (this is guaranteed to happen according to the French transport minister), the government should become more receptive to aviation expansion needs. France is the great un-tapped goldmine of European aviation when it comes to the low cost sector and now airlines might well have a chance to lobby the French government with greater success to get access at the right prices and so improve connectivity and create much needed jobs – There has never been a better time to move for this market. Keep an eye on Air France’s Hop! low cost venture as the signs are good for rapid expansion of this brand if it is managed correctly.
Meanwhile the forced sell-off of airline shares by banks receiving bailouts continues as Spanish bank Bankia sold its 12.1% stake in IAG to institutional investors last Thursday for £580m. This move is no big deal as we have known for many months that the bank had to sell off the shares (its corporate holdings) after receiving a state bailout, the timing was however poor for the bank as it chose to seal the deal just after IAG announced that Iberia was unprofitable in all markets and “it’s [Iberia] problems are critical”. IAG shares remain at 260p on Friday from a recent high of 280p last month. This share deal highlights that although we are in a period of possible shareholder instability for some there remains strong up-take among institutions for aviation – For now.
Over in the Americas, JetBlue Airways saw massive share trading on Friday –rising by 9% at one point to $6.63, on the back of reports that David Neeleman, founder and former CEO of JetBlue and owner of Azul Linhas Aereas, is setting-up an investment fund to buy back control of JetBlue and purchase TAP. Neeleman has denied these reports. By our calculations some of the shorts traded on Friday would require JetBlue shares to increase by 12% during the next 30 days to bring a profit given that the breakeven point is a share price of $7.075 – So are they mad? Well maybe not…….
This brings us full circle back to Chinese economic data: Chinese economic woes have sent oil futures falling another 16 cents to $96.39 a barrel. US crude stockpiles are at recent highs and thus oil is likely to continue falling. Brent crude is now down 6% on the quarter but was up 2% last month.
But I leave you today on an interesting point from the Paris Air Show that many will find of interest. The completion at the show of the Air France A350 deal indicated that Rolls Royce had given ground on engine maintenance to Air France - Air France Industries had been blocking the signature of the engine GTA because RR refused to authorise AFI to maintain the RR engines but not only this – they have also secured authorization to maintain third party engines. Is it me or did Rolls Royce blink and give ground for the first time? There will be a few airlines with MRO arms wondering what they did wrong in their negotiations. This proves that MRO involvement in aircraft deals is now essential at the top table – Something that we have been batting on about in Airline Economics for a fair few years now. Air France has just saved a fortune – This is perhaps the best deal of the Paris Air Show 2013.