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StockBeat: Airlines Suffer as Oil Spikes in Response to U.S. Airstrike

By Geoffrey Smith

Investing.com -- The 2020 rally in European stocks didn’t last long.

Markets were down across the board on Friday after a U.S. airstrike in Iraq killed a senior commander of the Iranian Revolutionary Guard, the latest in a series of lethal incidents that have raised fears of a broader confrontation between the U.S. and Iran.

A textbook “risk-off” move has followed, with most equities falling and the price of Oil as well as haven assets such as bonds and Gold all rising. The benchmark Euro Stoxx 600 reversed all of its gains from Wednesday and more, falling 0.7% to 416.86 by 5:20 AM ET (1020 GMT). The U.K. FTSE 100 was down 0.4%, while the German DAX was down 1.5%.

As usual, the airline sector is among the worst hit, although the two big underperformers – Germany’s Lufthansa (DE:LHAG) and Air France KLM (PA:AIRF) – have other woes to worry about, too.

According to reports, Lufthansa got its second downgrade in as many days on Friday morning, with Kepler analysts downgrading it to “reduce” with a price target of 14.30 euros. On Thursday, Citigroup (NYSE:C) had downgraded it to “sell” from “hold” with a target of 14 euros. The targets imply a downside of nearly 10% from the stock's current level.

That followed the outbreak of a new wave of strikes at its discount flyer Germanwings, where cabin crew are pursuing better conditions for part-time work. The strikes caused 180 flights to be cancelled over three days of the busy holiday season.

Given that discount airlines like Germanwings are the last great hope of the old-school flag carriers in defending their market share, and given Lufthansa’s already low operating margins, the last thing it needs is a simultaneous increase in both fuel and labor costs, as well as strikes that reduce aircraft availability. The shares were down 7%.

Air France-KLM, another national champion dogged by chronic labor problems, was down even more – by 7.6% - after two of its unions, representing both pilots and cabin crew, called a strike for Monday and Tuesday to protest the pension reforms of President Emmanuel Macron.

Elsewhere in the sector, Ryanair (LON:RYA) CEO Michael O’Leary was also in the news, telling the German magazine Wirtschaftswoche that the airline may have to wait until October for its first delivery of 737 MAX aircraft from Boeing (NYSE:BA). He also said he won’t talk about compensation until it’s clear when it will receive the planes it has ordered. Ryanair is one of the biggest European buyers of the 737 MAX, having ordered 135 planes. The report implies that none will be operational in time for the key summer season.

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