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.

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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.

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