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Short Airlines in the European No Fly Zone

|Includes:AAL, Ryanair Holdings PLC (RYAAY), UAL, UAUA

The Icelandic Eyjafjallajoekull volcano started erupting for a second time in a month on Wednesday April 13, and it has erupted consistently since. The winds pushing the volcanic ash over Northern and Central Europe are supposed to continue until Monday at least. Most Northern and Central European airports are scheduled to be closed until Monday (based on the latest predictions).

The eruptions have no expected end date. They may go on for weeks or months. Whenever the wind blows toward Europe, the airports may close down. The air is at least mildly hazardous to your health. Many businesses will be hurt, especially the tourism business. Who would schedule a trip to Europe with the large possibility of ash in the air? How could one enjoy the lively atmosphere of the sidewalk cafes, when they are deserted due to ash? Could you enjoy your food with ash in it? Could one enjoy seeing ash laden tulips in the Netherlands? The short term damage is measurable. The long term damage may be. The volcano could stop near term, but who would have faith in that? We are in for at least 3+ months of fear at least. We may in reality see 3+ months or more of these “ash filled” conditions with the wind blowing the ash at its whim over Europe.

With this in mind, one has to think the airlines will be dramatically effected. They are losing $200M/day currently. By the end of Friday they had already cancelled 20,000+ flights. The US airlines will be negatively effected, but the European airlines will be devastated. Initial estimates of costs to the airline industry are $200M/day.

The airlines’ equities have rallied recently beyond reasonable values on expectations of profits. Now they may see their expected profits turned to losses overnight. One has to believe this will push them downward. The table below shows some pertinent data for three big European airlines: British Airways (OTC:BAIRY), Air France - KLM (OTC:AFRAF), and Lufthansa (OTCQX:DLAKY). I have included AMR for comparison.

 

 

Stock

BAIRY.PK

AFRAF.PK

DLAKY.PK

AMR

Current Price

$36.16

$15.90

$17.24

$8.79

1 yr. Target Price

$46.00

N/A

$21.10

$12.86

PE

No Earnings

No Earnings

No Earnings

No Earnings

FPE (FY2011)

278.15

No Earnings

57.47

18.70

Mean Recommendation

1.0

--

1.0

2.0

FY2010 EPS Est.

-$4.52

N/A

-$0.19

-$0.63

FY2011 EPS Est.

$0.13

N/A

-$0.30

$0.47

FY2010 Revenue Estimate

$12.14B

N/A

N/A

$22.40B

FY2011 Revenue Estimate

$12.67B

N/A

N/A

$23.88B

Fiscal Year End

March

--

December

December

 

 

I apologize for the lack of data, but much of the data I wanted was not available on Yahoo and TD Ameritrade. AMR has a debt to capital ratio of 142.51% (MRQ). I checked British Airways on the London Stock Exchange. That shows British Air has a net debt that is roughly 3 times the market capitalization. It appears to be in even worse shape than its American counterparts. It has been fighting a strike recently. With this latest news, it is hard to believe that this stock will be able to justify its price. Although I have not looked, Air France - KLM and Lufthansa are likely in roughly the same boat.

This new volcanic activity in Iceland gives every indication it may be a long term problem. It has already hurt airlines. It will hurt them much, much more. There is the actual business. Then there is the future business of those vacationers who try Mexico, Central America, South America, and Australia/New Zealand as alternative destinations. They may discover they prefer those regions. The Olympics are coming to Rio de Janeiro. Many may take that as an invitation to pre-screen the area. Mexican and Central American beach areas are already loved by huge numbers. Rio is famous for its beaches. These areas may get more business still.

The above 3 stocks are good shorts. Unfortunately, you cannot short OTC Bulletin Board securities. If you own them, I would strongly suggest selling them for now. You can always buy them back if you so decide. If you want to short them, you will have to short them on their individual exchanges. British Airways trades on the LSE under the symbol, BAY. Air France - KLM trades under the symbol AF on the NYSE Euronext. Lufthansa trades on the Xetra and the Frankfurt Stock Exchange. You will have to consult your broker about how best to access these systems.

If you are only interested in US traded stocks, you might look into AMR, CAL, and UAUA. They all have substantial European routes. They all are heavily indebted with little or negative book values. Ryanair (NASDAQ:RYAAY) is another stock that is getting hurt badly in Europe. However, it has a debt/capital ratio of only 48.57% compared to the much higher ones of AMR, UAUA, and CAL.

Good luck trading.



Disclosure: no positions at this time.
Stocks: RYAAY, AAL, UAL, UAUA