IAG and easyJet shares: should I buy for 2021?

IAG and easyJet shares have risen since November and UK investors are buying. Edward Sheldon looks at whether that’s a smart move.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

International Consolidated Airlines (LSE: IAG) and easyJet (LSE: EZJ) are two shares popular with value investors right now. In recent weeks, both airlines stocks have featured in Hargreaves Lansdown’s list of most purchased stocks.

The share prices of both IAG and EZJ have risen since November. And, looking ahead, I think there’s a chance they could continue to rise. That said, these are not stocks I’d buy for my own portfolio today. Here are two reasons why.

IAG and EZJ shares: near-term challenges

Firstly, I expect the airline industry to continue experiencing challenges in the near term. This could create setbacks for companies such as IAG and easyJet.

Just last week, the International Air Transport Association (IATA) – a trade association of the world’s airlines – said that forward airline bookings have weakened at the start of 2021. The IATA warned the situation is likely to get worse before it gets better.

According to IATA’s chief economist Brian Pearce, the industry saw some “modest improvement” in bookings immediately after the vaccine news in November. However, that trend was reversed towards the end of December and into the first few days of 2021.

We’ve actually seen quite a sharp drop-off in bookings, which means that the immediate outlook looks pretty challenging,” he said, citing the impact of spiking virus cases and the introduction of further travel restrictions by governments around the world.

Pearce stressed that while the performance of the financial markets and airline stocks suggests Covid-19 is over, in reality, it isn’t. “We can see light at the end of the tunnel but it’s still some way away, and the situation is likely to get worse first.

This outlook leads me to believe IAG and easyJet shares could be volatile in the near term.

Warren Buffett doesn’t like airlines stocks

Secondly, history shows that airline stocks such as IAG and EZJ are generally not good long-term investments. Their share prices can enjoy periods of strength at times, however, more often than not, this share price strength is eventually reversed.

There are a couple of reasons airlines don’t make good long-term investments. One is that, in the airline industry, many things can go wrong. A plane crash or terrorist attack can dramatically impact sentiment towards air travel. Meanwhile, higher fuel prices can hit profits.

Another reason is that operating a fleet of aeroplanes requires an extraordinary amount of capital. Given the huge costs airlines face to keep their planes running smoothly, most don’t earn strong returns on their capital over the long term.

Don’t take my word for it. Here’s a quote from Warren Buffett. “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines,” he said in 2007.

Better stocks to buy

Given that both the short- and long-term outlooks are uncertain for airline stocks, I won’t be buying IAG or easyJet shares for my portfolio.

All things considered, I think there are much better stocks to buy for the long term.

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.

Edward Sheldon owns shares in Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown. 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »