IAG and Air France-KLM Shares Decline Amidst Rising Oil Prices

Shares of International Airlines Group (IAG), the parent company of British Airways, and Air France-KLM witnessed a significant drop on Friday, falling by 3% and 6% respectively. Investors have attributed these declines to concerns about the airlines’ weak outlooks, primarily driven by escalating oil prices due to the ongoing conflicts in the Middle East.

This surprising turn of events comes despite both airlines recently reporting record-breaking quarterly profits. The profits have been a result of sustained strong demand across all their routes, with a particular focus on North and South Atlantic destinations, as well as leisure hotspots across Europe.

IAG and Air France-KLM are not alone in this predicament, as several other European airlines have enjoyed robust recoveries in the years following the pandemic. However, they are now grappling with a series of emerging crises within the aviation industry, raising questions about the sustainability of their success.

Jared Ailstock, managing partner of AIP Capital, a global aviation investment and asset management company, emphasized the need for cautious optimism among investors. The aviation sector, still reeling from the effects of the pandemic, is struggling to regain the levels of profitability seen before the COVID-19 crisis.

Ailstock argued that, among the various challenges impeding the aviation industry’s path back to pre-pandemic profitability, labor and fuel costs are currently the most significant factors denting airline profits. Additionally, supply bottlenecks in the production of new and essential aircraft are now contributing to an engine crisis, which could pose the most severe challenge for airline operations.

Earlier this year, the industry witnessed the removal of 1,200 Pratt & Whitney engines from Airbus A320neo jets for inspection. This further strained an already scarce supply of aircraft, leaving an estimated 350 aircraft grounded until 2026 when the issue is expected to be resolved.

According to data from Cirium, approximately 370 aircraft, ranging from Airbus A320neos to Boeing 737 Max jets, are currently classified as “stored” due to engine repair issues. Cirium, an aviation data and analytics company, defines these as aircraft that have been idled for 30 days or more for various reasons.

More recently, U.S. engine manufacturer RTX has announced that hundreds of Airbus jets may be grounded in the coming years due to a rare manufacturing flaw. Coupled with the severe staff shortages faced by the aviation industry, supply chain issues are set to exacerbate a “tug-of-war” over engines between airplane factories and repair shops. This could result in approximately 650 jets sitting idle in the first half of 2024.

As a response to these challenges, alternative investment and asset management firms are addressing supply chain bottlenecks, including engine repairs, to ensure the aviation industry can sustain its growth trajectory.

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