Airlines: Heathrow & Oil

Shares in easyJet are 0.3% higher after UK lawmakers, following years of delays, finally approved a third runway at London’s Heathrow airport. Having eschewed the expensive hub due to the capacity and cost constraints which go hand in hand, recent comments about a willingness to set up a base at Heathrow, if a third runway was approved, mean that the colour ‘orange’ could be visible at Heathrow within a decade.

Airlines: Heathrow & Oil

Shares in London listed airlines are understandably hampered by oil’s continued rebound from OPEC-meeting lows, rendering fuel costs more expensive. Two, however, stand out with the rather divergent performance but for the same reason.

Shares in easyJet are 0.3% higher after UK lawmakers, following years of delays, finally approved a third runway at London’s Heathrow airport. Having eschewed the expensive hub due to the capacity and cost constraints which go hand in hand, recent comments about a willingness to set up a base at Heathrow, if a third runway was approved, mean that the colour ‘orange’ could be visible at Heathrow within a decade. It would also mean the airline eventually having the operational advantage of a base at each of London’s major hubs.

 IAG shares, however, are lower (-1.4%) on the prospect of a third runway meaning more competition (both short and long-haul) at Heathrow. Especially from a such a highly successful and seasoned short-haul rival like easyJet. The green light is logically aimed at relieving pressure on an airport which has continued to grow over the years. The flip side for IAG, however, is that expansion may end up putting pressure on both IAG and peers – typically flag carriers, which have benefited from being able to charge a premium for using Heathrow – as new capacity makes each slot less valuable and more economically viable.

Unless, of course, there is so much competition that the new capacity is hoovered up at current prices, perhaps even at a premium, keeping the budget players away. In the meantime though, might the airlines even have to pay a bit more for slots to help fund some of the £14bn projects? They’ve already complained of higher charges to fund Terminal 2 and 5.

There’s still a long way to go, and the sceptic in me can’t help but look to the UK’s tendency for major projects (especially those which are years, even decades, in the making) to overrun on time (completion aimed for 2026) and almost inevitably budget (Crossrail 25% over budget). So we could be talking a decade at least before its up and running. For now, though,  the laws of supply & demand, what it will cost, and easyJet’s statement of intent would have it that budget could fare better than flag at Heathrow.

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