Should I buy crashing airline stocks?

Airline stocks have faced considerable uncertainty in the past year and the challenges are far from over. Are IAG and EZJ bargain buys?

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International Consolidated Airlines (LSE:IAG) and easyJet (LSE:EZJ) saw their share prices fall today as the UK government is expected to delay its reopening by another month. So is this a good opportunity to buy these airline stocks in the dip?

IAG fundamentals

IAG owns British AirwaysIberia, and Aer Lingus, and its share price has been erratic ever since Covid-19 hit. Nevertheless, it’s bounced impressively above its lows and is up 31% year-to-date.

But today, IAG’s earnings per share are negative and its debt exceeds its market cap. The reason for its low valuation is the sheer uncertainty the pandemic has brought to the industry. Until airlines can get back to flying at pre-pandemic capacity, they’re losing money.

Despite today’s dip, the IAG share price is down less than 3% from its 52-week high. This makes me think it may have further to fall if the uncertainty continues to weigh on investor hopes.

Airline stocks weighed by debt

In the past year, IAG has increased its debt burden considerably. In Q1 this year alone, its net debt rose by €1.8bn.

However, by the end of Q1, IAG had €10.5bn of liquidity, beating its pre-pandemic level of €9.1bn. The faster it recovers, the quicker it can pay off debt without incurring penalties. But if this is drawn out, the penalties could severely impact its ability to offer shareholder value.

I don’t think there’s any doubt that pent-up demand for foreign holidays is there. In theory, this should mean an upsurge in bookings for flights. But it will ultimately depend on what consumers can afford and if flight prices increase. Plus, of course, the lifting of Covid-19 restrictions.

I don’t currently hold IAG shares, and I’m reluctant to take the risk. But, on the other hand, it could prove a phenomenal recovery play if all goes well with the reopening and the country gets back on track to a more normal future. But so far, that’s not a given.

easyJet predicts 15% capacity in Q3

The uncertainty ahead is just as prominent for easyJet. It’s currently projecting 15% capacity for Q3, compared to 2019 levels, which is not a lot of income to look forward to.

easyJet has also racked up considerable debt. But much of it doesn’t mature until 2023. Although, it does have to repay £300m by November 2021.

In response to the chaos caused by the pandemic, the company has brought in significant streamlining measures over the past six months. This was necessary and should greatly benefit the strength of the company in the future.

easyJet is an instantly recognised and popular budget airline in the UK. I don’t think it’s going to go out of business, but I think the challenges ahead make it a risky investment. Its share price is likely to be subject to extreme volatility in the coming years. I think there are stocks with a less uncertain future that I’d prefer to invest in long term. So I don’t intend to add either of these airline stocks to my Stocks and Shares ISA today.

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.

Kirsteen 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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