German airline Lufthansa (Frankfurt: LHA) warned on profits this morning, after it reported falling sales at its budget carrier brand, Eurowings and rising fuel costs. The share price fell by more than 10%.
In effect, competition between short-haul operators in Europe, combined with a less forgiving oil price backdrop, has made life a lot tougher for the airline, which now expects profit growth for the year to come in at 5.5%-6.5%, versus previous expectations for 6.5% to 8%.
It’s hardly the only travel group to find the going tough right now – tour operators TUI and Thomas Cook have both warned on profits this year. We’ve also seen the collapse of airlines including Monarch and Flybmi.
Budget carrier easyJet has seen its share price fall hard in the last year or so – down by about 45% – while rival Ryanair and British Airways owner International Consolidated Airlines have each lost around a third of their value.
Are there any bargains in the sector yet? On a dividend of more than 5% and a forward price/earnings ratio of around ten, budget carrier easyJet (LSE: EZJ) – which was recently kicked out of the FTSE 100 and now trades within the FTSE 250 – is starting to look interesting.
But given the current brutal competition and significant overcapacity in the sector, combined with the potential for more Brexit over-reaction panics later in the year, I’m not convinced that either it or its slightly pricier rival Ryanair are “buys” quite yet.