This week witnessed the arrival of Air France on the Paris stock exchange as the French government placed 21 per cent of the airline on the stock market, valuing the group at more than €3.1 billion (£2.44 billion). The sale was postponed from last year due to labour unrest within the company and in particular the pilots' strike in the run-up to last year's World Cup finals. However, Air France has tried to change the company's culture and its pilots have agreed to a pay freeze in exchange for shares in Air France. Clearly it is not only in Irish privatisations that workers are given favourable treatment in return for a more stable labour relations environment.
Trading in Air France shares got off to a flying start and the first traded price of €18 was 26 per cent above the issue price of just over €14 and the shares finished the day with a rise of 18 per cent at €16.5. Although the company faces a decline in revenues as a slowdown in global economic growth hurts sales, demand for the shares was strong given the strength of the brand name backed by a major government advertising campaign. The strong debut by Air France sent airline stock prices soaring as positive sentiment swept the sector.
However, this contrasts with negative returns from many of Europe's airline stocks over the past year. For example the British Airways (BA) share price has under-performed the British stock market by more than 30 per cent over the past year. In early August of last year the shares peaked at 700p sterling (1,030 cents) and have since hit a 1999 low of 345p before recovering to their recent price of 457p. Weakening demand post the Asian slump and the Russian crisis led to a sharp fall off in revenue from the lucrative business class traveller. In the final quarter of last year, BA reported a loss of £75 million compared with a profit of £80 million in the same period a year earlier.
Despite the tougher environment sentiment towards the major airline, stocks such as BA and Germany's Lufthansa have been improving as the results of cost cutting programmes begin to bear fruit. The performance of the Republic's low-cost airline, Ryanair, stands in sharp contrast to that of its larger competitors. Sales and profits have continued to grow strongly over the past two years as the company opened up new routes and experienced strong growth from its existing routes. By flying into secondary airports such as Beauvais outside Paris and selling virtually all its seats at low prices, Ryanair has effectively created new sources of demand.
Although Ryanair is tiny compared with the major European flag carriers it is now being faced with competition from new low-cost subsidiaries such as BA's low-cost carrier, Go. Despite greater competition, ongoing deregulation of Europe's air transport system should present Ryanair with ample opportunities for growth.
Despite its strong underlying sales and profits performance, Ryanair's share price has been just as volatile as its larger competitors. The share price peaked at 751 cents in 1998 and has fallen as low as 400 cents as it suffered from negative market sentiment towards airline stocks. The shares have since recovered strongly from their low point and look set to do well in coming months. Market movements in quoted airline stocks do highlight the high operational and financial gearing that is a feature of the industry. Airline stocks in the US have always been far more volatile than the overall market, and as the European airline sector expands, investors in Europe can continue to expect to see a similar high degree of volatility in the share prices of European airline stocks.
