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“Elephants in a Funnel”

22 August 2016 by pdonnat

The airlines sector is one of the worst performing equity sectors since the beginning of the year. In Europe, the 5 airlines stocks members of the STOXX Europe 600 are all down by more than -20% this year - Easyjet being the worst performer at -40%, while Ryanair is the best performer down -20%. We have the same picture for all flag carriers worldwide. Last week, Cathay Pacific reported weak earnings due to disappointing passenger traffic numbers. In Europe, Air-France KLM CDS premium has risen from a low at 250bps at the beginning of March to 460bps at today’s close - as the attached Grapple displays. IAG and Lufthansa CDS have been so far stable on the CDS side. Air-France KLM is struggling with larger costs than most of its competitors. However, the industry is struggling with way too optimistic traffic forecasts against more circumspect travelers - leisure and business included. Airlines are very sensitive to growth expectations; some may not be able to survive a global traffic reduction.