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UK Equities
UK airlines fall on capacity glut fears
From the Financial Times of Mon, 08 Dec 2014 18:39:24 GMT

Cheaper oil should be a reason not to buy airline stocks but to sell them, according to Merrill Lynch.

EasyJet and IAG, the British Airways owner, have been the FTSE 100’s biggest gainers since August in response to a 50 per cent drop in the price of jet fuel. But cheaper fuel has also given a lifeline to weaker operators, suggesting the industry could be facing a capacity glut next year, the broker argued.

“We expect high-profile profit warnings next summer,” said Merrill. “Remarkably, in the last sharp oil price drop in 2008, higher capacity quickly ensued as airlines scrambled to take advantage. The difference this time is that we are on the cusp of the largest capex cycle in airline history (meaning planes will not be hard to find).”

Deteriorating profitability means easyJet’s 2015 earnings guidance “looks optimistic”, said Merrill. The shares slipped from an eight-month high, down 3.2 per cent to £17.05, having gained 31 per cent since the start of August. IAG, which has jumped 41 per cent over the past four months, faded 1.8 per cent to 477.7p.

Brent crude’s slide to a new five-year low weighed across the wider market, leading the FTSE 100 down 1.1 per cent, a 70.69 point fall to 6,672.15. Royal Dutch Shell B retreated 2.6 per cent to £21.72 and BP slipped 1.7 per cent to 417.3p.

Weir Group lost 5.3 per cent to £17.41 on continued worries that reduced expenditure among shale oil companies will force the pumpmaker to cut earnings guidance.

“Unless something unexpectedly positive happens with oil prices, we believe there will be a sharp fall-off in [North American] rig activity of perhaps 400-500 rigs in the months ahead from the fourth quarter peak,” said Cowan & Co. No recovery for oil could mean significantly fewer than 1,300 rigs operating in the second half of 2015, from 1,855 this year, it forecast.

Randgold Resources held steady at £41.86 and Acacia Mining, the recently renamed African Barrick Gold, took on 6.3 per cent to 251.3p. Deutsche Bank turned positive on both stocks as part of a sector review, which looked at the gold miners’ sensitivity to diesel prices and local currency operating costs.

Hargreaves Lansdown lost a further 2.9 per cent to 962.5p following Friday’s surprise resignation of its chief finance officer Tracey Taylor.

Marks and Spencer slipped 2.7 per cent to 483.5p on reports of problems at its delivery distribution centre, which analysts said could mean online sales will continue to shrink for the fiscal third quarter.

Playtech, the gambling software maker, rose 2.4 per cent to 674.5p after Citigroup set an 840p target price. Sensible deployment of Playtech’s €650m of acquisition firepower would boost that target to 915p, Citi said.

Asos was up 2.5 per cent to £23.79 after a block of 4.8m shares, equivalent to nearly 6 per cent of the fashion website, changed hands via Merrill Lynch. Only Asos co-founder Nick Robertson, Capital Group and Danish retailer Bestseller hold more than 6 per cent of the stock.

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