Airlines: upgraded

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Airline investors usually end up squeezed into a middle seat, well in back. Lately they have been sitting, not in first class, at least on the aisle. The sector generally performed well in 2012; in Europe, Bloomberg’s sector index soared over 50 per cent. To an extent, this upward trajectory has continued in 2013. The index has risen by another third, beating the Stoxx 600. That said, the ride has become bumpier since the summer when overall progress stalled.

This seems counterintuitive. Improving economies should boost travel demand. Restructuring at Europe’s flag carriers should pay off eventually. Currency movements are not helpful, but fuel prices, while high, are edging down. All of this is true, up to a point. Demand does, indeed, seem to be picking up. One Morgan Stanley survey suggests that most corporate travel managers expect bookings to increase in 2014, while the International Air Transport Association is making upbeat noises.

The big question is whether rises in demand will be trumped by increases in capacity. In the recession, capacity discipline kept ticket prices firm. But now specific capacity increases in the European low-cost market have been blamed for Ryanair’s profit warnings.

Generally, though, the picture looks better: most forecasts suggest that capacity will grow next year, but that the rate of expansion should be in low single-digits, which would be far from calamitous. As for overhaul plans, these are at different stages. International Airlines Group is ahead of the game, but still managed to lift its target for synergies from recent acquisitions and its forecast for 2015 profits last week. By contrast, Air France-KLM and Lufthansa have further to go, and now face poor cargo trends, too.

In short, there may still be altitude to be gained. But only one thing would really help keep the excess capacity threat off the radar: more consolidation, and the sooner the better. There is some hope. Alitalia’s fate, for example, is up in the air.

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