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Tough times lie ahead for Europe’s airlines

These are tough times for airlines: Analyst

European airlines are set for some major turbulence in the coming months, according to analysts, who predict the Brexit vote and terrorism will impact consumer demand.

"It's a tough time for airlines at the moment," Andrew Lobbenberg, airlines analyst at HSBC, told CNBC Monday.

"You shouldn't underestimate the impacts that were going on anyway of rising capacity in the airline industry putting fares under pressure."

Krisztian Bocsi | Bloomberg | Getty Images

The U.K.'s departure from the European Union has weakened sterling and hit consumer confidence, he added. Meanwhile, the series of terror attacks and security incidents throughout Europe are another factor dampening travel demand, according to Lobbenberg.

Budget carrier Ryanair believes Brexit may hold implications for its business.

"We will pivot our growth away from U.K. airports and focus more on growing at our EU airports over the next two years," the company said in its earnings report Monday.

"This winter we will cut capacity and frequency on many London Stansted routes (although no routes will close)."

The Irish airline reported a 4 percent rise in profits in the first quarter, but warned that average fares were falling.

"This modest 4 percent increase in (first quarter) profit to 256 million euro ($281 million) is in line with previous guidance," Michael O'Leary, CEO of Ryanair, said in the report.

"The absence of Easter in (the firs quarter) and on-going market volatility arising from terrorist events, and repeated ATC (air traffic control) strikes (particularly in France) weakened fares on close-in bookings and caused almost 1,000 flight cancellations."

Other airlines are faring worse than Ryanair. Last week, Lufthansa issued a profit warning due to the impact of terrorism on flight bookings; the company's share price dropped 8 percent on the news.

Stock in Europe's airlines have suffered in 2016. Ryanair's share price has fallen 22.8 percent year-to-date, while shares in easyJet are down 41.4 percent year-to-date.

"We have seen a number of the largest European airlines profit warn over the last month," Jarrod Castle, research analyst at UBS, said in a report released this week.

"EasyJet, IAG and now Lufthansa have all warned based on the outlook for the trading environment which over the last few months has increasingly become more difficult due to factors beyond the control of these companies."

And while several airlines, including Lufthansa, are benefitting from lower oil prices, this may not be enough to offset pressure on earnings.

"The trading environment has taken a turn for the worse due to geopolitics and recent events which means it is likely that only a marginal amount of the net benefit will be retained," said Castle.

"While Lufthansa will generate nearly 1 billion euros of fuel tailwind, we think based on current guidance the majority of the tailwind will be passed on to consumers," he added.

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