Ebola, oil and security are three priority operational issues that are confusing the outlook for airlines. Across Europe some earnings have crashed while others took off. Meanwhile shares have rallied over the last week, after a sustained slump.
Over the next three weeks we will hear from all of Europe’s listed airlines, but the real action is likely to be with those first on the runway, Air France-KLM and Deutsche Lufthansa. Both stocks are about as far below trend earnings as they ever get and implied volatility is plummeting even faster than it soared two weeks ago. One effective way to trade the recent market ups and downs was to identify that overall volatility had not exceeded its two year range (https://blog.otastech.com/x/EYBN) and when it turned, to buy stocks where volatility had overshot. (https://blog.otastech.com/x/LoBN, https://blog.otastech.com/x/BABU). Airlines are clearly in this camp.
Ebola is bad, but a lower oil price is good. Earnings expectations across Europe have turned positive over the past month, although this is a clear example of the old saw that head in the oven, feet in the freezer means on average you’re fine. EPS Momentum at SAS is over 50% positive and that at Air France-KLM 26% negative, with all the others grouped closely in single digits. After these changes, SAS trades bang in line with the trend in forward estimates, but AF does not, as shown below.
Looking back over many years it is hard to find a period when the the stock price diverged more from the trend in forward earnings. This is also the case at Lufthansa.