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Flight path

Fund managers are cautious about investing in airlines following changes to security in the wake of the recent alleged terrorist plot.

Hand baggage changes will increase costs particularly for budget carriers,which rely on high passenger volumes and quick turnover.

Royal London Asset Management senior UK equities fund manager Bradley Mitchell says the changes will drive up costs.

Passengers flying from the UK can only take luggage the size of a laptop bag on board. Mitchell says the changes will deter people travelling short distances who are used to packing all they need for a few days and taking their case on board.

Mitchell says: “It is going to affect passenger numbers for city breaks.”

RCM UK fund manager Trevor Green says the big question facing budget carriers is whether the carry-on changes are here to stay.

He says: “For passengers on long-haul flights, delays of an hour or two are just a fact of life but for someone going from London to Edinburgh on business for the day, this is a real pain,”

Ryanair shares have been under pressure since the terrorist threats and the ensuing airport chaos. Its shares fell by 5 per cent in the five trading days after heavy security measures were put in place across airports.

Airline industry analyst Andrew Fitchie at brokerage company Collins Stewart has put the cost of the disruption to British Airways at around 50m, the cost to EasyJet of 10m and the cost to Ryanair at 2.5m.

Fitchie says the security measures are likely to reduce the number of flights that budget carriers can schedule in a day.

He says: “They work on quick turn-rounds but you do not need many more minutes added on each turn-round before you are out of daylight hours and enter flight restriction times.”

He adds that the long- term impact to British Airways is limited.

Ryanair chief executive Michael O’Leary is threatening to sue the Government for compensation unless airport security measures return to normal.

EasyJet is to begin charging passengers who check in more than one bag from September 1.

Chief executive Andy Harrison says the new security arrangements are expected to remain for the foreseeable future.

He says: “Passengers need to think a little more carefully about how much luggage they take and that is what these changes are designed to do. They will speed up check-in and security and make the airport experience better for everyone.”

Christows head of research Jim Wood-Smith was never a believer in the discount airlines’ minimal luggage strategy. He says: “I am not convinced that their strategy works. When you go on a holiday, you will have bags with you.”

He says Christows is underweight in investment in airlines but he believes the discount airlines are in a growth market while the national carriers are in decline.

“Everything has a price but I do not think the discount carriers are very cheap at the moment,” he adds.

Mitchell says RLAM, which has 25bn under management, has avoided airline stocks, largely because of the rising cost of oil.

He says: “Many of the problems that the airlines face are going to be here this year, next year and the year after. We are not going to see the price of oil back at $40 a barrel for a long time. In terms of terrorism, you only have to be unlucky once.”

Shares in most travel and leisure companies took a hit in the days following revelations of the alleged terrorist plot but most shares have since recovered or even shot higher.

Green says he looked for possible beneficiaries following the problems but made no changes to his investment strategy. “We decided the benefit was too marginal,” he says.

Lloyds TSB Financial Markets chief economist Trevor Williams says some areas within the travel and leisure sector have enormous potential. He says: “The aerospace market is booming.” He says growth in emerging markets such as China and India are providing growth opportunities for manufacturers of airplanes and airplane parts.

He says: “This terrorist plot has affected the UK and the US but there is a bigger world out there. This is not going to end travel.” He adds that military spending is also boosting earnings for manufacturers.

Last week, the share price of BAE Systems surged after it signed a deal to sell 72 Typhoon jet planes to Saudi Arabia.

Williams admits the rising oil price is a problem for airlines but says it will merely “determine the ticket price, people will still be flying.”

He adds: “Investors have to look at the fundamentals and use the scares as a way to seek value and then ride out the turbulence.”

Axa Investment Managers strategist Axel Bott, says the utilities sector could benefit as investors shift to less risky investments.

He also believes that gold stocks could prove popular because they act as a hedge against geopolitical turmoil.

Mitchell is bearish on most of the travel and leisure sector, with the exception of travel and holiday group, First Choice.

He says: “It has a strong business model, good management and they proved after 9/11 that they have the ability to flex their business model to adapt to even the most severe challenge.”

Mitchell says the group has moved into high-margin niche markets such as adventure holidays, which is proving successful.

He concludes: “British Airways already has to contend with rising oil prices, a big pension deficit and labour relations issues, without the additional headache of a renewed terrorist threat.”

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