Those people at Heathrow who want to build another runway because their airport is full are not kidding. While every other leading British airport has been reporting a bumper summer season, Heathrow squeezed in another 0.1 per cent passengers in August, up to 75 million in the past year. Air traffic movements at the west London hub are stuck at flat.
This is not good news for the airline group called International Consolidated Airlines Group or IAG, which in all but name is British Airways with a little bit of extra earnings (sometimes) from its Spanish and Irish carriers.
BA is Heathrow’s dominant airline and plainly has nowhere there to grow. Set this against a UK aviation market expected to mirror falling GDP economic activity. People will keep flying but they will expect to fly cheaper: not good news for airline profit margins. Brexit means that suddenly BA’s strategy is not based on a UK economy that will lead Europe out of recession; it is now an airline based in a UK economy expected to be as moribund as the rest of Europe.
So what next? Damian Brewer, an RBC Capital Markets analyst, is one who is struggling with the investment case as IAG is hunted down by lower-cost airlines on short-haul while on long-haul, better service and product is on offer elsewhere. Under the pilotage of Willie Walsh for more than a decade, IAG and BA have lived on a diet of cost-cutting. Falling demand and the devaluation of the pound will doubtless mean more of the same. Yet Mr Brewer wants to see something different when IAG convenes its its capital markets day next month.
“We think IAG needs to provide a clear strategy update for each of its airlines [BA, Iberia, Vueling and Aer Lingus], which will need to go beyond the short-term reactionary tactics of cost-cutting,” he says. He also makes the case for greater transparency on the operating performance of each airline.
The Brexit vote devalued the pound by about 15 per cent and IAG’s share by more than double that. That puts the airline group on about six to seven times this year’s earnings. Low, but for a reason. Peak confidence in this stock has long past and the future remains uncertain. Tempus has not been convinced about IAG in the past. It is even less so now.
MY ADVICE Avoid
WHY Hit by the devaluation of the pound and the uncertainty around the UK economy, investors needs to know what the strategy is going to be
Goals Soccer Centres
Goals Soccer Centres has some notable parallels with Sam Allardyce. Like the England football team, Goals, a purveyor of five-a-side football facilities, has got new personnel at the top, is in rehab, has a new strategy (ie: do better) and the results as they stand are encouraging without being overwhelming.
The pair’s targets are not too complicated, either: Big Sam wants his version of England’s finest to beat other teams; Goals is laying newer, better pitches to attract more punters.
Yet like beating moderate opposition by a goal in injury time, any apparent recovery in Goals’ performance needs to be compared with the awfulness that went before. A 2 per cent fall in like-for-like sales in the first half of 2016 isn’t good, but it isn’t as bad as the 11 per cent dive at the end of last year.
And the uncertainty around the UK economy is like the opposition putting ten men behind the ball for a business whose margins need increased “dwell time” by getting those who like a diet of contested free kicks to stay on for after-match food and drink?
Like taking a view on Big Sam’s prospects, it is early days to be diving in on Goals.
MY ADVICE Pass
WHY Too little form to judge whether this lot can win
Ocado
As we are back in the 1950s — an island state with a whiff of austerity, the return of grammar schools and where chief executives are apparently portly and play golf on Friday afternoons — Ocado should be in its element. It didn’t try to reinvent the wheel, but took an idea from yesteryear and got called a technology stock because instead of customers phoning through grocery orders on the Bakelite, they were using the web.
The “buy” case for Ocado is the narrative that bricks and mortar is dead. Rather than consumers getting stuck in traffic and faffing around supermarket aisles deep into the evening, the Ocado van will get stuck in traffic and turn up during the ten o’clock news, leaving you to faff around unpacking the order and wondering what to do with all that quinoa.
Ocado bulls suggest ignoring traditional fundamentals and just feel the 21st-century potential. But we are back in the 1950s and Ocado’s latest trading figures show that belts are being tightened, with average spend down 4.5 per cent.
Add in narrowing profit margins because of supermarket discounting and the rising cost of imported foods; increased competition and the spectre of Amazon Fresh; and that City bears have made this one of the most shorted stocks on the market, and you have to ask yourself whether to phone in an order for Ocado shares.
Ocado’s market value is £1.75 billion even after yesterday’s 14 per cent share price slump. This year’s pre-tax profits will come in at £7 million. The answer has to be “no”.
MY ADVICE Sell
WHY High ratings are about tomorrow’s delivery of jam
And finally . . .
Jefferies, the stockbroker, reckons shares in Go-Ahead Group are worth £21 each in its “worst-case scenario” of the failure of the group’s blighted GTR Southern rail franchise. It says if things recover, the bullish scenario suggests the stock might be worth as much as £26.65. Last night, Go-Ahead’s shares closed down 18p at £20.75, which would suggest the City (many of whose denizens have had to travel on this summer’s wretched services) is betting on worse than the worst-case scenario. Can things only get better?
robert.lea@thetimes.co.uk
