Governments bailouts are coming to Europe Governments bailouts are coming to Europe Governments bailouts are coming to Europe

Governments bailouts are coming to Europe

Equities 8 minutes to read
Peter Garnry

Head of Equity Strategy

Summary:  In today's equity update we focus on Europe's utility sector which is running into profitability issues over Europe's gas crisis with the German utility Uniper asking for a bailout of EUR 9bn due to higher costs for gas as Gazprom has cut its gas supplies to Europe. In the travel sector, European airliners are experiencing a horrible summer with labour shortages and SAS has recently failed to strike a deal with around 1,000 pilots pushing the airliner into Chapter 11 to negotiate a restructuring in order to get better unit costs. Bailouts are back in Europe.


Uniper and potential nationalisations of the utility sector

Europe’s gas situation was already deteriorating rapidly before Russia’s invasion of Ukraine but after the war it has gone from bad to worse. The 1-month forward natural gas future has galloped to 170 EUR/MWh zooming in on the highs from when the war broke out. These punitive natural gas prices are having a demand destruction in Europe already with emergency plans being enacted in many countries in our to ration gas supplies for the industry if the gas supply from Russia is cut even further. Many industrial stocks in Europe are down recently as the outlook is gloomy.

Gas storage in Europe is still trending well within the past 10 years seasonality pattern suggesting that despite lower supply of gas storage is still rebuilding at the same pace suggesting demand is lower at these high prices. Another recent casualty of Europe’s gas crisis is the German utility company Uniper, which is 75% owned by Finnish Fortum, which is no longer receiving the gas volume from Gazprom that it has contracted (only 40% of its previous gas volume) and as a result the utility is forced to acquire the gap in the spot market at punitively high prices.

Uniper has recent issued a profit warning and cancelled its outlook while seeking a government bailout of as much as €9bn to cover the extra costs. Both E.ON and RWE have less exposure to Russian gas than Uniper but other utilities in Europe could face same issues as Uniper and thus more government bailouts could be on the table in Europe’s utility sector. To preserve gas for its industry, Germany has declared gas emergency level 2 (out of 3) and will allow extending coal fired electricity generation to lower gas intake in its electricity generation.

European utilities vs Uniper | Source: Bloomberg
Europe Gas Storage seasonality plot | Source: Bloomberg
1-month forward natural gas futures | Source: Bloomberg

The pandemic is catching up with the travel sector

SAS failed yesterday to strike a deal with around 1,000 pilots to cut costs and as a consequence the airliner has filed for Chapter 11 bankruptcy in the US which allow SAS to continue to operate while it discusses with its creditors a plan to restructure the business. The European airlines industry was already underperforming before the pandemic, but from an operations point of view SAS had actually got its house in order.

In its fiscal year before the pandemic that ended in October 2019 the airliner generated SEK 3.1bn in operating income down from SEK 4bn the year before and had only SEK 2bn in net debt while modernizing its fleet. The pandemic hit the travel sector hard and SAS went from SEK 46bn in revenue in fiscal year before the pandemic to SEK 20.5bn in the fiscal year ending October 2020 and down to only SEK 14bn in the fiscal year ending October 2021. SAS is expected to generate SEK 32.1bn in revenue in the fiscal year ending October 2022. While this is an impressive rebound relative to other airliners such as Norwegian it is still a shortfall of SEK 14bn in revenue and as a result the airliners economics of scale have been lowered requiring lower operating costs on a unit basis. In addition the increased net debt is reducing overall cash flow generation allowing less cash for investments to upgrade its fleet to make the company more cost competitive.

SAS has only one way out of the dark and that is to drastically cut costs, convert a large part of its debt to equity wiping out existing shareholders, and then raise additional equity with the help of the Scandinavian governments to reduce the net debt situation and invest in newer planes to reduce unit costs. Overall, the SAS story is the story of the European airliner industry that is structurally unhealthy and does not deliver return on invested capital above the cost of capital. With many airports having reached a physical limit, Schiphol in Amsterdam will cut its capacity next year to reduce noise pollution and NOx emissions, and interest rates going higher we expect ticket prices to continue to go up in Europe and many the airport capacity constraint is exactly what the industry needs to become more profitable going forward.
SAS, MSCI Europe Airliners Index, STOXX 600 | Source: Bloomberg
Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)


Boulevard Plaza, Tower 1, 30th floor, office 3002
Downtown, P.O. Box 33641 Dubai, UAE

Contact Saxo

Select region

UAE
UAE

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.