Would I buy IAG or Easyjet stock today?

IAG and EasyJet stock are beaten down and, with vaccines rolling out, might be poised for a recovery. But James J. McCombie would buy another airline stock instead.

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The coronavirus pandemic has been devasting for airline stocks like International Consolidated Airlines (IAG), the owner of British Airways, and Easyjet. In 2020, industry-wide revenue passenger kilometres (RPKs) — flying a paying customer one kilometre equals one RPK — fell back to levels last seen in 1999 according to the CAPA fleet database.

The number of passenger aircraft in service fell from 23,600 at the end of 2019 to 16,700 at the end of 2020. Despite airlines slashing the number of planes in active service, the load factor — a measure of how full planes are — fell back to around 65%, which is a level not seen since the 90s.

IAG and Easyjet stock nosedive

It will come as no surprise that the share price of Easyjet is down 43% over the last 12 months. IAG stock has also tumbled 59% over the course of a year. Both companies experienced slumps in revenue in 2020 and issued sizeable amounts of debt to generate cash. Today, British Airways announced it had received an additional £2.45bn in debt financing and will not be paying dividends to its parent, IAG, before the end of 2023. In January, Easyjet signed up for a £1.4bn five-year loan facility, bringing the total raised during the pandemic to £4.5bn.

Considering only the short-term woes of IAG and Easyjet makes it easy to forget that industry growth was healthy before the pandemic. Except for 2001 and 2009, industry RPKs had been growing every year since 1996. In 2017, despite thousands more aircraft taking to the skies, industry load factors were more like 80%.

The pandemic will end eventually. Perhaps experience with remote working will eat away at some business travel, and long-haul trips will be taken with trepidation for a while. Still, eventually, people will take to the skies in large numbers again. Airline stocks are, I think, poised for a recovery, but there is still rough air ahead.

Who to fly with?

There are four London-listed airline stocks. Market cap to revenue ratios splits them into two groups: IAG and Easyjet with lower than average ratios and Ryanair and Wizzair with higher. The Wizzair share price is up 14% over the last 12 months, and Ryanair’s share price has risen 6% over the last year. It appears that stronger cash positions going in and gentler debt raising during the crisis for Wizzair and Ryanair explain much of the difference in valuations.

Name Ticker Market Cap Revenue Market Cap to Revenue
Ryanair RYA €15.41bn €2.37bn 6.5
International Consolidated Airlines IAG €7.9bn €16.35bn 0.5
Wizz Air WIZZ €4.12bn €937.06m 4.4
Easyjet EZJ £3.73bn £3.01bn 1.2

Source: Financial Times Markets Data and author’s calculations

Ryanair and Easyjet are short-haul market competitors, but Ryanair has a stronger balance sheet. But IAG is restructuring to compete with low-cost airlines like Ryanair and Easyjet domestically. Its long-haul and business class travel routes will probably take longer to recover fully, if at all.

Short-haul competition between Ryanair, Easyjet, and IAG is likely to be fierce. For this reason, I would, and indeed have bought shares in Wizzair. It is based in Eastern Europe and serves a slightly different short-haul market than the other three. However, even a younger and more robustly growing Eastern European air travel market is not immune to a protracted pandemic. If travel restrictions linger longer than expected, no airline will be spared the pain.

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.

James J. McCombie owns shares of Wizz Air Holdings. The Motley Fool UK has recommended Wizz Air Holdings. 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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