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UK airlines cruising comfortably

Last updated: 11:56 07 Nov 2014 GMT, First published: 12:56 07 Nov 2014 GMT

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Oil prices have reached four-year lows on world markets. That’s good news for airlines.

Cheaper jet fuel has given the major operators a lift, and a series of earnings upgrades in recent days indicates the carriers are set to fatten their profit margins over the winter.

British Airways owner International Airlines Group (LON:IAG) was the latest to give evidence of that positive shift. The firm reported a €210mln rise in operating profit in October to €900mln compared to last year, helped by lower a 7.5% reduction in fuel costs for the quarter.

Better still - the group has just laid out plans to pay its maiden dividend in its new corporate form.

Lower fuel costs have coincided with healthier economic growth in the UK and US economies, putting transatlantic operators in pole position. 

Sentiment has soared back since September, when stocks were hit by fears of a worldwide shutdown due to the Ebola crisis.

IAG shares are among the best monthly performers on the FTSE100, up 20%, while Ryanair (LON:RYA) and Easyjet (LON:EZJ) shares have risen 19% and 12% respectively.  

US carriers too have benefited.  American Airlines (IAG’s partner on transatlantic routes) and United Airlines both reported strong third-quarter profits, while the Dow Jones US Airlines Index has notched up a record a 20% rise in October.  

Short haul specialists are also flying high.

Ryanair (LON:RYA) posted better-than-expected half-year profits this week. Passenger numbers for the no-frills airline rose 4% to 51.3mln, while average fares increased by 5% to €54. Easyjet (LON:EZJ) has also enjoyed higher passenger numbers while adding routes. 

“We increasingly view growth in European short-haul as a two-horse race between Ryanair and Easyjet,” said Robin Byde, transport analyst and Cantor Fitzgerald.

The growth has takena toll on European rivals. Lufthansa and Air France have been trying to expand their discount operations and reduce costs to compete with budget carriers. Both have been hit by strikes over cost cutting plans where pilots and cabin crew would be paid less.

Lufthansa warned on Thursday it would no longer reach its revised goal for next year.  Air France-KLM said on Wednesday it would speed up cost-cutting measures and limit investment next year after a two-week strike over plans to expand its budget airline Transavia.

By contrast, IAG is starting to show sustained progress with the turnaround of Iberia, its Spanish carrier that was had been running up large losses.

"As Lufthansa and Air France butt heads in air routes with excess capacity, rising costs and fierce competition by budget and Middle East carriers, IAG cements growth through outstanding performance in London. Also, moderate economic growth and the Iberia overhaul play in IAG's favour,” Commerzbank analyst Johannes Braun said in October.

“IAG remains in a class of its own,” he added.

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