easyJet and IAG shares are flying, but which should you buy?

The IAG share price has lagged behind easyJet’s share price this year. Roland Head explains what he thinks will happen next.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The easyJet (LSE: EZJ) share price has risen by 15% over the last week. British Airways owner International Consolidated Airlines Group (LSE: IAG) has gained nearly 20%. However, IAG’s share price is still the bigger loser in 2020, down by 65%.

Here’s why I think easyJet is a better buy at the moment. And why I think IAG is a stock to avoid at the moment. 

easyJet: Short haul winner

Air travel has been massively disrupted by the coronavirus pandemic. But now that flying has restarted, airlines are delivering quite different results.

The strongest recovery so far is in popular short-haul holiday routes. easyJet says that flights to popular European destinations like Faro and Nice were 84% full in July.

Bookings for the rest of the summer are “better than expected”, according to easyJet CEO Johan Lundgren. He says that scheduled flights will return to 40% of normal capacity over the next couple of months.

easyJet appears to have a clear route back to normal operation. The disruption caused by in-flight hygiene measures such as face masks and reduced cabin service is bearable on a cheap short-haul flight. People want to go on holiday after lockdown.

The airline still faces some challenges, but it seems clear to me that easyJet’s business model still works. Its financial situation looks safe enough to me, too. I don’t think easyJet will run out of cash.

IAG faces tougher test

IAG’s main airline brands are British Airways, Iberia, and Aer Lingus. As flag carriers for the UK, Spain, and Ireland, these airlines run a lot of long-haul flights. The prospects for recovery in this market look much tougher than on short-haul routes.

Whereas easyJet hopes to achieve 40% of flying levels by the end of September, IAG is only targeting 26% of its normal schedule, rising to 34% during the final quarter of 2020. I think this is one reason why IAG’s share price is underperforming easyJet’s at the moment.

Demand for long haul is heavily dependent on corporate travel. This could be slow to recover. Businesses want to save cash and quarantine restrictions mean that short business trips to many destinations aren’t practical right now.

Why I expect the IAG share price to crash

Back in June, easyJet acted quickly and raised £419m in a share placing. The level of dilution was fairly low, as the new shares issued represented just 15% of the existing total.

IAG has now decided it needs more cash, too. It’s planning to raise a chunky €2.75bn by selling new shares. My sums suggest this is likely to increase IAG’s share count by at least 65%.

Worse still, we won’t know how the new shares will be priced until September. I think there’s a good chance investors will demand a big discount to invest fresh cash at this time. If I’m right, we could see IAG’s share count double. In that scenario, anyone who didn’t take part in the fundraising would see their share of the airline’s future profits halved.

I expect IAG’s share price to slump when the terms of the fundraising are finalised. For now, I think the situation is just too uncertain. I’d avoid IAG shares until we know more.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »