IAG, EasyJet & Ryanair: should you invest in airline stocks this year?

Investments

2021? Ryanair, EasyJet and IAG stocks are under observer’s watchful eyes right now and could find their wings once again in the coming year. Are they worth investing in right now?

Should you add IAG, EasyJet or Ryanair stocks to your portfolio?

Why Airline stocks could bounce back in 2021

Air travel stocks have taken a beating over 2020. Forbes reports that the NYSE Arca Global Airlines Index lost more than 31% over the previous year, with many major carriers reporting losses. As a whole, industry revenues fell 65% year-on-year across the board. Unfortunately, we have seen bankruptcies. UK affordable carrier Flybe was one such victim.

But there may be some hope that good flying conditions could emerge later in 2021.

Firstly, global cases may be starting to drop as research from John Hopkins University in the US suggests. From a January peak of 700,000 cases per day, the number has fallen to 500,000. That’s obviously still an alarming figure, but the drop is encouraging.

Vaccines continue to instil hope that some form of normality is in sight – maybe not crystal clear in a clear light of day, but still an emerging glow at the end of what seems like a very long tunnel. Uptake in countries like the UK and Israel has been exceptional, and its hoped vaccine programmes in other countries can catch up.

In some countries who reacted well to the virus, casual travel is already starting to return. China, for instance, saw over two million seats occupied on domestic flights towards the tail end of last year, and is projected to reach 90% pre-pandemic capacity by 2020. Indian carrier IndiGo’s CEO Ronojoy Dutta is confident domestic levels will reach 100% of pre-pandemic capacity by April. Australia is doing well too.

We’re stressing those numbers are domestic. International travel will take longer to recover, but it does offer a sliver of hope that normality for airlines could return in 2021.

However, with so many things about this pandemic, we simply don’t know. Airline stocks like EasyJet, IAG or Ryanair shares, may be worth buying now to hold onto later, but all investing and trading is risky. This may incur substantial losses if you are not careful or if market conditions do not enjoy less stormy skies.

EasyJet stocks

EasyJet lost two-thirds of its market cap in the pandemic’s initial phase. Since then, despite its fleet being grounded, despite the layoffs, and despite the cloudy outcome for airlines in general, the stock has regained 44% of its value. It may still be trading below its 1,500p pre-pandemic levels, but as of today, EasyJet shares are trading for about half that.

Cash reserves are a good barometer of a business’ resilience. EasyJet says it has about £2.5bn in cash reserves against monthly expenditures of £160m. That means it has enough to last the year. Backed with a £1.4bn government loan, the budget carriers balance sheet has been strengthened.

A potential explosion in international travel post-lockdown could mean UK travellers turn to low cost favourites like EasyJet to ferry them to warmer climes. That could mean a new rally on EasyJet stocks. For now, though, keep a watchful eye on them as uncertainty still in the airline industry.

IAG stocks

IAG owns British Airways, amongst other airlines, and is weathering the storm like all major carriers. IAG stocks have fallen 64% in the past twelve months, with its market cap falling to £8bn. Revenues have slumped too, falling over 70% in the third quarter. Not great.

Like EasyJet, however, British Airways was able to secure its own government-backed loan, to the tune of $2bn, to keep operational, so cashflow should be less of an immediate concern for investors right now.

Is this a case that IAG is simply too big to fail? Potentially. There may also be a bit of national pride playing into sentiment here. British Airways is after all the UK’s national carrier, and given the jingoist feeling of the current Conservative government, letting BA hit bankruptcy, especially in the face of Brexit, wouldn’t exactly play well with the Tory voter base.

IAG may have what it takes to show long-term price recovery. In September, IAG announced it had raised around €2.7bn in capital (£2.3bn), which would take total liquidity to €6.6bn (£5.7bn), with cash reserves of €5bn (£4.3bn). Forecasts suggest it may return to profitability by 2022, and even begun paying dividends again by then.

With the IAG share price rising 80% of the last six months, there may still an inkling of investor confidence surrounding the Group. But be warned: IAG is still trading 45% lower than its record highs, and with the way the industry is, until the planes start flying high, stocks might stay terrestrial.

Ryanair Stocks

Ryanair share prices are down 13% y-o-y in January, but, like the other stocks mentioned here, may have enough liquidity in the bank to ride out the coming year. According to Morgan Stanley, Ryanair has enough cash reserves to keep going for the next 15 months, totalling €4.5bn (£3.9bn).

Predictions in the short term are not great. Ryanair stocks may record losses of up to 73 US cents per share for the fiscal year ending March 2021. However, next year, earnings-per-share could be back up to 56 US cents.

Why? Well it’s a mixture of things, but its mostly vaccine-driven recovery leading to a loosening of travel restrictions. As suggested above, Ryanair has the liquidity to withstand another year, and there may be further potential for acquisitions, picking up airlines that are nearing bankruptcy, if market recovery starts to bear fruit towards the end of 2021.

Credit Suisse has confidence in Ryanair’s ability to improve cash flows going forward. The Swiss bank forecasts Ryanair to make €1bn in advanced bookings for the last quarter of 2022, and a further €600m in positive flows by that year’s end.

Ryanair stocks maybe one to watch.

But again, investment and trading always come with a high level of risk. Uncertainty is high right now for the entire aviation sector. Positive price movements for Ryanair stocks, as well as EasyJet and IAG shares, will be focused more on financial resilience and pandemic-battling measures in the short term.

 

Bumpy ride for Ryanair

Equities

Fares down, traffic up, costs jumping – more of the same kind of themes we’ve been seeing for a number of quarters from Ryanair and for the whole European airline sector.

Ryanair has issued a couple of profits warnings in the last year but we have little sense that things are really improving as there still a lot pressure on margins. Today’s full-year numbers and outlook cement the view that it’s a tough space to be in right now – although we would hope that summer 2019 will be the worst of it. The risk is that the downturn in the macroeconomic outlook in Europe worsens as this would further dent airlines’ bottom lines.

Profits sink

Full-year after-tax profits were at the low end of the January guidance at €1.02bn. This was already lowered from the € 1.1bn- € 1.2bn previously forecast. Pre-tax profits including Laudamotion were down 30% at €948m.  

The absence of Easter in the fourth quarter in 2019 was partially blamed for the 6% decline in fares, but we must also note that the overcapacity in the market and the sector’s ability to compete away margins. Traffic growth was meanwhile up 7%, or up 9% including Lauda. Ancillary income flattered profits and made up for some of the drop in fares. 

Costs soar

Ex-fuel unit costs surged 5% but this was less than the 6% previously guided, so we must give credit for cost control. As previously argued, unionisation and rising labour costs are a long-term drag on Ryanair’s low-cost model. Ryanair booked €200m in higher staff costs, which included the 20% pay increase for pilots, and €50m in extra compensation costs due to ongoing ATC strikes and staff shortages. Staffing costs were up 28% for the year.

Higher oil prices are the biggest headwind to profits – FY2019 fuel costs were €440m higher, or 23%, than the year before. Bigger fuel bills are really weighing but as one of the stronger companies Ryanair should be well placed to benefit from further consolidation in European short-haul that this pressure on profits will exert across the sector.  

Outlook weak

The guidance appears weak – profits for 2019 are seen between €750m and €950m. Management also says it has zero H2 visibility on fares – a lot depends on no negative Brexit developments and peak summer pricing delivering at the last minute. 

Costs are a growing headache- Ryanair’s full-year fuel bill will rise by another c20%, or €460m, this year.  Ex-fuel unit costs will rise by another 2%.”

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