Should I buy TUI shares or Jet2 shares?

Rupert Hargreaves weighs up the pros and cons of buying TUI shares compared to Jet2 shares as ways to invest in the economic recovery.

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As the world reopens after the pandemic, the travel industry is taking tentative steps towards recovery. Improving investor sentiment towards the sector has helped push TUI (LSE: TUI) and Jet2 (LSE: JET2) shares above their pandemic lows. However, both firms face very different outlooks. 

Indeed, TUI has far more diversification across its different business lines. After several bailouts by the German government, it also has a stronger balance sheet

However, Jet2 has several attractive qualities as well. 

The outlook for TUI shares 

TUI is a travel and tourism giant. It owns cruise ships, hotels, planes, and everything in between. This gives the company an edge over smaller competitors who may rent this equipment from third parties at higher prices. 

Unfortunately, this diversification didn’t help the company in the pandemic. It suffered almost as much as any other business and had to be bailed out three times. 

But the company is now on the road to recovery. According to its latest trading update, 876k customers travelled with the group in the quarter to the end of June. That’s compared to 159k in 2020. The report also noted that a total of 4.2m customers were booked to travel with TUI in the 2021 summer season. 

While these developments are positive, there’s a cloud hanging over TUI shares. The company has elevated debt levels, and its bailouts came with strict rules. In particular, they banned bonuses and dividends. This implies investors won’t see any income from the stock anytime soon. 

Are Jet2 shares the better buy? 

Jet2’s operations are far smaller than those of TUI. The airline and travel business flew 15m people in the financial year ending 31 March 2020 and took nearly 4m people on holiday. TUI took 20m+ customers on holiday every year before the pandemic. 

Still, I think Jet2 shares look more attractive than TUI shares. There are a couple of reasons why I hold this view. First of all, the group, which operates the UK’s third-largest airline by the number of passengers flown, has a strong balance sheet. At the end of its financial year, the company had £1.4bn of cash after raising money from investors. 

It’s also more flexible. TUI’s sprawling international operations provide diversification and more customer choice, but they also cost more to maintain. The company can’t just stop spending on these assets overnight. 

By comparison, Jet2 can restructure its airline operations to serve the routes with the highest level of demand. This is a strategy it’s pursued exceptionally well in the past. 

Nevertheless, there’s no guarantee this will continue. TUI’s diversification may serve the company better in the recovery. Jet2 may continue to struggle if demand for air travel remains sluggish. 

Despite these risks, I’d buy Jet2 shares for my portfolio over TUI shares. I think the former has more flexibility and a stronger balance sheet, while the latter may struggle with its sprawling operations and government restrictions.

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 considered so you should consider taking independent financial advice.

Rupert Hargreaves 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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