JOHN Menzies shares slid to a 20-month low after the Edinburgh logistics group reported margin pressures in its key airport ground-handling business and a £2.2 million hit to profits from the strength of sterling.
Menzies said its aviation business continued to progress and underlying operating profit was up seven per cent, with 80 contracts won in the first half of the year. But the 31 contracts lost was higher than normal, and the group expects a sharp drop in earnings from its UK ground-handling business in the second half due to upheavals at Heathrow, the biggest of its 149 airport operations worldwide.
The turbulence comes as Menzies begins the search for a chief executive, following last week's surprise announcement that aviation director Craig Smyth, one of the group's three-person executive, has resigned.
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A group spokeman said the airport headwinds reflected "the very competitive markets that currently exist, particularly in Europe". He went on: "Yield pressure is intense and we have lost a number of contracts on price. It is our belief that a more orderly market will return following further market consolidation and the recognition that good service can only be delivered at an economic rate." At Heathrow there had been "unprecedented operational upheaval" with 15 airlines changing their handling agent, the spokesman said.
"As a result of this, we expect earnings from the UK ground handling business to be significantly down on the previous year. Excluding the UK, all other regions are trading positively and continue to deliver to plan."
Paula Bell, finance director, said: "We are becoming more selective with the contracts we want to win... contracts that had more lucrative margins have been rebased to more average margins, the worst of that is now behind us." She said attention was now on Spain where "a lot of airports are up for grabs", and that was the key focus of "a big team" in the aviation division.
Menzies' major rival Swissport came under fire earlier this month over a baggage-handling crisis at Gatwick, amid allegations that the company's use of zero hours contracts had impacted on its staffing resources. John Geddes, secretary at Menzies, said they had no zero hours contracts.
On whether the crisis might throw up opportunities for Menzies at Gatwick, Mr Geddes said it remained to be seen. Ms Bell said she had "never seen so much change at an airport" as at Heathrow, and it would add to the group's cost base there. Menzies warned in February of a possible £4m hit this year from the strength of sterling and a £2.2m impact was felt in the first half.
On a constant currency basis, turnover was up £27m to £1.02bn but reported turnover was down £5m at £992m. Stripping out currency the operating profit was up marginally to £26.2m instead of down to £24m. Pre-tax profit was down from £18.4m a year ago to £14.2m, a drop of 23 per cent. The dividend however is raised five per cent to 8.1p. Menzies distribution arm recorded a £2.1m rise in turnover to £638.7m and underlying profit up from £11.8m to £12m. Its latest rationalisation programme continued with the closure of four more depots including Dumfries. Ms Bell said the rate of decline in newspaper and magazine sales had slowed after a "horrid" 2013, and was now more akin to the two previous years.
Chairman Ian Napier said aviation remained well placed in a market with positive growth dynamics, while distribution had enjoyed a good first half.
"Overall, I am pleased that the group continues on a strong financial footing with excellent prospects."
The shares slid 26p to 615p, the lowest since the end of 2012.