One of the big events of recent years has been the fall in the oil price. I firmly believe that low oil prices are set to be a long-term feature of the economic landscape.
This means you should sell commodity companies such as BP and Shell, and buy into firms that will benefit from low fuel prices, such as the airlines. So in this article I will look at the investing merits of three of Britain’s most popular airlines: International Consolidated Airlines SA (LSE: IAG), easyJet (LSE: EZJ) and Ryanair (LSE: RYA).
International Consolidated Airlines
IAG owns globally renowned brands British Airways and Iberia. This company has endured many lean years in the oil price boom of the past 17 years and reinvented itself during this time as a firm that offers a premium service at a reasonable price.
And low commodity prices mean a business that was once barely profitable has seen its earnings rocket. In 2013 earnings per share were 5.44p. In 2015 they were 51.96p. This is a dramatic turnaround, and analysts are predicting 2016 EPS of 86.38p, giving a P/E ratio of just 5.88, with a dividend yield of 4.48%.
These are enticing numbers. If oil prices remain low, then this is a company that’s set to do very well. I rate IAG a strong buy.
easyJet
If IAG provides a premium service at a reasonable price, then easyJet is low-cost air travel for the masses. And in this low-cost world, this has been an immensely successful formula.
This firm is also seeing rising profits, and a dividend that’s on the up as well. A forecast 2016 P/E ratio of 9.53, with a dividend yield of 4.23% means that easyJet is attractively priced. And I think this comparatively young brand shows the potential for further growth, as cash-strapped consumers in Europe increasingly look to save money on their travel.
Ryanair
Ryanair is the controversial low-cost airline that reduced costs so much during the lean years that it was still highly profitable then. And its profits are rising as fuel prices fall.
Yet as European economies recover, will more consumers will look to premium brands such as British Airways rather than the no-frills carriers?
I think that many consumers will still want to take the budget route, and that there’s still a trend towards low-cost air travel. Just as Aldi and Lidl are increasing market share in the supermarket business, so easyJet and Ryanair are increasing market share in air travel. Companies will always want to save money on flights, and so will holiday-makers.
Because of its rapid growth, Ryanair is a little more expensively priced, at a 2016 P/E ratio of 13.81, and no dividend is paid out, but the potential for further growth means that it’s still a buy.
