Over the last month, the easyJet (LSE:EZJ) share price is up 15%, while shares in International Consolidated Airlines Group (LSE:IAG) are down 3%. In the context of 2024, this is interesting.
The stock market is clearly taking the view that 2024 will be a better year for easyJet than IAG. But with both businesses operating in the same industry, is this justified?
Air travel in 2024
There’s an obvious difference between easyJet and IAG. One is a low-cost airline focused on short-haul routes and the other is a larger operation with a broader outlook.
In general, analysts are strongly favouring the former for 2024. There are a few reasons for this.
One is the competitive landscape. Long-haul carriers have been expanding capacity across the board since the pandemic, leading to concerns about oversupply.
Another is the macroeconomic outlook. A strong jobs market in the EU is likely to keep demand for short-haul travel across the continent fairly strong, which is a benefit to easyJet.
A third is the geopolitical situation. Uncertainty in Ukraine and the Middle East is typically negative for travel demand, but it’s long-haul journeys that typically see the most disruption.
The potential for higher oil prices is also an issue. But airlines with stronger balance sheets – such as easyJet, which has managed to eliminate its debt from the pandemic – are in a better place to cope.
A stock to consider?
I’ve been impressed with the way that easyJet has recovered from the pandemic. The stock is way down from where it was five years ago, but the underlying business looks to be in a decent position.
Analysts are projecting earnings per share (EPS) of 56p for 2024, rising to 77p by 2027. If the company can hit those targets, the stock looks like a bargain – but I think that’s quite a big ‘if’.
The travel industry is notoriously cyclical and while it’s not impossible for earnings to go up consistently, it is very unusual. So I’d be careful with thinking that this is going to happen from here.
The last time the company posted three years of consecutive EPS growth was 2013-2015. Obviously the pandemic had something to do with that not being repeated, but earnings were volatile before 2019.
A low-cost operator like easyJet might find itself less susceptible to shifts in supply and demand than larger carriers like IAG. But I’m still not convinced the only way from here is up.
I’m therefore wary of buying easyJet shares at today’s levels. The market’s expecations for earnings growth look risky to me, so I’d prefer to stick to businesses where I think the outlook is clearer.
easyJet or IAG?
Overall, I’m expecting the easyJet share price to do better than IAG’s in the coming year. The issues that I see for both companies are likely to weigh on the latter more heavily than the former.
IAG stands to benefit from long-term industry consolidation, which could help reduce competition and boost margins. The company is attempting to move this along with a takeover of Air Europa, but this is somewhat speculative and still a way off.
Right now, though, while I prefer easyJet, I wouldn’t go so far as to buy the stock. I reckon there are more obvious opportunities at the moment.
