Market Report: EasyJet levy could spark recovery in budget sector

Like the rest of its peers, 2011 has been tough on easyJet, with climbing oil prices helping its share price lose over 20 per cent since the turn of the year. Yesterday, however, the budget airline ticked up as investors' hopes were raised that the introduction of a new levy by Ryanair could spark a recovery for stocks in the sector.

Earlier in the week the Irish group announced a new charge of €2 per passenger to cover the cost, it said, of EU regulations on compensation for cancellations and delayed journeys. Describing the news as "potentially very significant," Investec said it could be "a turning point" for the industry as a whole that may prompt a sharp rally.

The broker said that Ryanair's policy of no fuel surcharges, as well as its public attacks on airlines which do have them, has "forced the network carriers to stop raising short haul surcharges," and it added the new levy meant the rest of the sector could follow suit.

"Airline demand is price-elastic, so this could choke off some demand," said its analysts."However, as long as all carriers adopt a similar levy, there'll be no competitive advantage – this is an orderly way of raising fares, led by the industry price-setter."

It predicted that, in the best case scenario, easyJet could gain £81m as a result of introducing the charge, and the group put on 3p to 340.9p despite the FTSE 250 closing 84.46 points lower at 11,591.98 and another rise in oil prices. However, International Airlines Group slipped back 5.5p to 227p, even though the broker said it may benefit by up to £82.5m from the levy.

Overall, the FTSE 100 just failed to stretch its winning streak to seven days, creeping down 39.54 points to 5,908.76. The session brought to an end a month in which the blue chip index dropped under 5,600, although its recent rally means it lost just over 85 points in total.

Pole position was taken by Randgold Resources as a positive production update and hopes of an end to the unrest in the Ivory Coast helped the precious metal miner. As well as the group's statement that it is on track to meet its output target for the year, market voices also pointed to speculation that the conflict in the west African country could be nearing a conclusion.

Randgold, which has a mine in the the Ivory Coast, surged forwards 401p to 4,968p, while its Alternative Investment Market-listed peer and fellow operator in the country Cluff Gold was 5p stronger at 109.5p.

In the wider mining sector, Vedanta Resources rose 65p to 2,379p after reports that its acquisition of a stake in Cairn Energy's Cairn India unit is getting close to gaining approval from the Indian government. Meanwhile, on the mid-tier index Petropavlovsk slipped back 63p to 998p after its full-year profit dropped 10 per cent.

Tui Travel was also updating the market, and it jumped down 2.3p to 227p, despite the tour operator saying bookings for the summer period were ahead of the previous year. Tui's mid-tier index peer Thomas Cook also shifted back, moving 4.2p to 170.6p in the wake of its large gains on Wednesday.

There was yet more bad news for the retailers, as Mothercare became the latest high street name to warn investors over conditions in the UK. The baby-products chain said its domestic profits would "remain under significant pressure" into 2012, and it slumped 42p to 400p as a result.

Dixons was still falling following Wednesday's profit-warning, with the electricals chain 1.12p behind at 12.57p. Neither Citigroup or UBS helped by cutting the group's price target to 14p, but Espirito Santo provided some hope, saying it believes "a recovery in UK consumer confidence is in sight and thus Dixons' high operational and financial gearing could work in its favour."

Meanwhile, the small-cap retailer Laura Ashley dipped 3.75p to 21.5p as it announced its like-for-like sales in recent weeks had fallen by more than 4 per cent. The rest of the sector continued to suffer, including Kingfisher which was driven back 8.5p to 245.9p despite Matrix's Tom Gadsby saying the B&Q-owner was positive on the sales prospects of its "royal wedding garden gnomes". However, Home Retail managed to creep up 0.2p to 193.1p as bid rumours continued around the group.

The housebuilders finished weaker even though data from Nationwide showed a 0.5 per cent increase in house prices last month. Bellway was the worst hit, retreating 16p to 696p, as IHS Global Insight's Howard Archer said the rise seemed "highly unlikely to mark the start of a sustained, significant recovery".

Taylor Wimpey was also in the red, sliding 0.66p to 40.62p, after announcing it had sold its North American unit for $955m to a team of private equity groups.

Down on AIM, Coal of Africa was the subject of vague takeover speculation yet again, although the revived chatter only lifted the miner 2p to 75.25p. Falkland Oil and Gas saw a much bigger boost of 11p to 90p after the blue-chip explorer BHP Billiton agreed to allow the group to take full control of their Falkland Islands joint venture.