I’m dreaming of jetting off on holiday to Spain or France this year. Sitting on a sunny terrace having lunch without a care in the world.
A dream is all it is at this stage. So with international travel having been heavily restricted over the last year, where does that leave airline stocks as an investment?
The industry has been decimated by the impact of Covid-19 restrictions. The share prices of International Consolidated Airlines Group (LSE:IAG), easyJet (LSE:RYA) fell an average of 55% in the last year.
Interestingly, the Ryanair (LSE:RYA) share price has recovered to pre-pandemic levels. So where do I think these airline stocks are headed in the future?
The sector
Having covered some of these companies individually over the last few weeks, I’m clear on my stance that I fully expect airline stocks to recover in the long term.
Things look bleak at the moment with international travel greatly restricted. The UK has moved to introduce mandatory hotel quarantine for international arrivals.
However, I’m an investor who focuses on the long term rather than seeking short-term profits. And I think airline stocks will return to regular flying numbers in five years.
They may not do so within the next 12 months, though. But I think business and leisure travel will return in a significant way. I also think pent-up demand for holidays will drive a lot of revenue for airline stocks when some degree of normality eventually happens.
IAG
British Airways owner IAG has seen its performance dive the most since Covid-19 began. However, at 160p, the shares seem really cheap to me today.
The company recently completed the acquisition of budget carrier Air Europa in a cut-price deal, and with smaller airlines struggling even more, further takeovers could happen.
I see the rollout of vaccines as being a major upside for IAG too and the main reason why I would buy it. It must be noted that the shares are really volatile however, and any further market setbacks in the fight against coronavirus could see the price fall further.
easyJet
FTSE 250-listed easyJet is going through a transition. CEO Johan Lundgren’s wants to take it a little more upmarket to compete with the likes of British Airways. But it’s been difficult to tell how that has gone with travel stunted so much.
I have reservations about that strategy, and also about the firm’s costs — ongoing costs at easyJet are higher than other airlines at €53 per passenger. The company will need to return to profitable trading soon to see any growth in the next few years.
However I feel these challenges can be overcome if normal trading conditions resume within the next year and still see plenty of value in the shares at 840p.
Ryanair
Ryanair shares have actually risen 4% in the last 12 months, despite the pandemic. Its solid balance sheet is perhaps one reason for this.
While the balance sheet may take a hit by the end of 2021 with further restrictions, I’m encouraged by analyst predictions of a return to earnings of 56 cents per share by next year.
With current passenger numbers 80% lower than this time last year, there’s a risk to buying Ryanair shares right now, but like easyJet and IAG, I’m confident of a sector recovery and would buy Ryanair for my portfolio today.
