Airline shares are still too turbulent despite recent gains

Figures compiled by International Air Transport Association (IATA), the industry’s trade body, demonstrate just how much is at stake if management makes even a slight misstep.

In 2013, the airline industry made a collective profit of $12.9bn (£7.8bn) on revenues of $708bn (£427bn), IATA calculated. That is a 1.8 per cent net profit margin. To put it another way, airlines made a profit on average of just $4.13 (£2.49) for each passenger they carry.

Last month, Air France-KLM issued a profit warning, blaming overcapacity on traffic to North America and Asia reducing air fares. It has since launched a five-year restructuring plan to drive down costs. Significantly for easyJet, part of this plan involves launching a new low-cost carrier as it increases its focus on short-haul markets.

Germany’s Lufthansa has also raised the idea of launching a low-cost airline, as it tries to deal with competition on long-haul routes from Middle Eastern carriers such as Etihad. It issued a profit warning in June that sent its shares falling 20pc in one day, blaming overcapacity on trans-Atlantic routes. In June, Air Lingus also warned that its annual profits could be a fifth lower than expected because of strike action.

The shooting down of MH17 over Ukraine and the mysterious loss of another Malaysian Airlines jet earlier this year added to the gloomy sentiment surrounding the industry.

Airlines had a further wobble earlier this month following a report that Russia was planning to restrict its airspace to European airlines in reaction to Western sanctions over Ukraine. This would results in long detours, with a consequent rise in costs that could wipe out delicate profit margins.

However, such a move would also hit Russian state-owned group Aeroflot hard, as the company receives about $300m (£181m) in fees each year from European airlines crossing Russian territory, so perhaps the fears are overdone.

In short, the industry is grappling with overcapacity, increased competition from new upstarts such as the Gulf airlines and a slowdown in passenger numbers, while some airlines are suffering their own unique problems.

Despite this backdrop, interim numbers from IAG, released on August 1, were pretty good. Operating profits in the second quarter beat City expectations, coming in at €380m (£303m) compared with a consensus view of about €355m (£283m). It also reiterated full-year guidance of an improvement in operating profit of €500m (£399m). This follows an improvement at its troubled Iberia operation which was losing €1.7m (£1.4m) a day a couple of years ago.

The most recent statement from easyJet, however, was disappointing. Management told investors the pre-tax profits in the year to September 30 would be between £545m and £570m – lower than the City had been expecting.

Positively for IAG, it also has an accident of geography acting in its favour. Many flag carriers have been suffering from competition from upstart Gulf airlines, but these companies are unable to compete on British Airways key trans-Atlantic routes.

However, it is clear that there are capacity issues on these routes. The Latin American economy, another important destination for British Airways, is also suffering from numerous problems that could keep demand low, including a sovereign debt default issue in Argentina.

For easyJet, the next few years could see an increase in rivals such as Norwegian grabbing market share – and the number of new carriers trying to eat its lunch could increase. There is also a resurgent Ryanair to deal with. In its favour, the company appears to have become adept at managing capacity.

Another risk is the fact that airlines and passengers are soft targets for taxes. Gouging airline passengers may provide short-term relief for governments with stretched budgets.

Aviation is a glamorous industry but don’t let the romance blind you. Airlines remain risky investments to own, despite impressive gains over the past few years.

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