Commercial passenger flights began over 100 years ago, but investing in airline stocks only became possible relatively recently. Today, investors have a number of options for airline shares on the London market. This article gives you the lowdown on the airline industry, the individual aviation stocks available, and the pros and cons of investing in the air travel sector.
What are airline shares?
Airline shares are publicly tradable financial instruments of aviation companies listed on a stock market.
Buying shares in an airline gives an investor part-ownership of a business that operates regular services for carrying passengers or goods by plane. If the business grows its profits over time, the company becomes more valuable. And, all else being equal, the value of its shares will also increase. In addition, companies may pay cash dividends to their shareholders.
Aviation companies come in different shapes and sizes, so comparing individual stocks isn’t always straightforward.
Traditional full-service airlines (also known as legacy airlines) typically offer checked baggage, meals, drinks, in-flight entertainment, pillows and other comforts in the ticket price. They often have long histories and are flag carriers for their countries.
Low-cost airlines (also known as budget or no-frills airlines) generally offer little beyond a seat in the ticket price, with any extras having to be paid for. They typically operate over shorter routes.
Differences have become somewhat blurred over the years. Full-service airlines now often charge for some of the extras. Meanwhile, low-cost airlines operate on a spectrum that could be said to extend from lower-cost to ultra-low-cost.
While no airline business model is inherently superior, an appreciation of the differences can help an investor understand the variations in some of the key metrics in the industry, such as revenue per seat and cost per seat.
Top LSE aviation stocks
Here are the top four aviation stocks on the London Stock Exchange:
|International Consolidated Airlines (LSE:IAG)||£7bn||Holding company diversified across flag carriers, low-cost brands and air-freight operations|
|easyJet (LSE:EZJ)||£4.2bn||Pan-European low-cost airline|
|Wizz Air (LSE:WIZZ)||£3.2bn||Ultra-low-cost airline, expanding from its Central/Eastern Europe stronghold|
|Jet2 (LSE:JET2)||£2.8bn||Low-cost airline and package-holiday brand|
International Consolidated Airlines
British Airways was floated on the stock market in 1987 as part of the spate of privatisations of state-owned businesses by the Conservative government of the era. International Consolidated Airlines (IAG) was formed by the merger of British Airways and Spanish flag carrier Iberia in 2011. The group subsequently added Irish airline Aer Lingus to its portfolio.
In addition to these legacy airlines, IAG owns low-cost European short-haul brand vueling and low-cost long-haul brand LEVEL. In the year prior to the Covid-19 pandemic, the group carried a total of 118m passengers. It has further diversification in the shape of its IAG Cargo division, which operates an extensive airfreight network. This serves over 10,000 businesses.
IAG is the biggest airline stock on the London market. The group is also the most diversified with its multiple passenger brands and air freight operations.
- Market Cap: £7bn (as of 26 April 2022)
- Average Daily Volume: 34.5m
- HQ: London, UK
easyJet was founded in 1995 and was floated on the London Stock Exchange in 2000. It’s a pan-European low-cost airline that’s built a strong position at many leading airports, with high customer demand. Indeed, it’s the number one or two operator in those primary airports it’s targeted. Its main competitors at such airports are the legacy airlines and charter carriers. It doesn’t need an ultra-low-cost model to compete successfully against these operators.
In the year prior to the pandemic, easyJet carried 96m passengers. That year it also launched package holiday brand easyJet Holidays. Over 80% of its customers travel for leisure. By offering holiday packages, it encourages those customers to spend more with easyJet, rather than book accommodation elsewhere.
- Market Cap: £4.2bn (as of 26 April 2022)
- Average Daily Volume: 7m
- HQ: Luton, UK
Ultra-low-cost airline stock Wizz Air was founded in Hungary in 2003. By the time of its London flotation in 2015, it had grown to be Central and Eastern Europe’s largest low-cost airline. It has since continued to expand its network of European destinations. It also has some medium-haul destinations in the Middle East and North Africa. In the year prior to the pandemic, Wizz carried 40m passengers.
The company has largely shunned expensive, slot-constrained airports, enabling it to focus on stripped-down ticket prices. It’s also shunned merger-and-acquisition activity in favour of organic growth. Having said that, management’s stated it hasn’t ruled out acquisitions should a compelling deal emerge. In fact, it was rumoured to be the mystery bidder behind a spurned approach for easyJet in 2021.
- Market Cap: £3.2bn (as of 26 April 2022)
- Average Daily Volume: 0.8m
- HQ: Budapest, Hungary
The origins of Jet2 origins go back to a company founded in 1971 to fly flowers from Guernsey to the United Kingdom. Its freight operations subsequently expanded considerably and it was floated on the UK Unlisted Securities Market in 1988. Three years later, it moved to London’s main market, with the name Dart Group.
In 2002, the group launched a low-cost passenger airline, branded Jet2.com. And in 2007, it added a package holiday brand, Jet2holidays. Ultimately, it divested its other operations to focus on these two businesses, changing its name to Jet2 in 2020. In the year prior to the pandemic, the company flew a total of 15m flight-only and package holiday single sector passengers.
- Market Cap: £2.8bn (as of 26 April 2022)
- Average Daily Volume: 0.8m
- HQ: Leeds, UK
Investing in foreign airline stocks
Most UK investors will be familiar with no-frills airline Ryanair. The company dropped its London listing last year, but its shares can still be bought on its primary listing exchange, Euronext Dublin.
Of course, there are other foreign airline shares investors may want to consider, such as the four big US players:
- American Airlines
- Delta Air Lines
- Southwest Airlines
- United Airlines
Are airline stocks right for you?
After almost getting stung by a foray into airlines in 1989, legendary investor Warren Buffett bemoaned the economics of the industry. He reckoned the airline industry as a whole had made a cumulative loss in the 100 years since the days of the Wright Brothers.
Yet, in 2016, he made a further foray into airlines, building substantial positions in the four largest US carriers. He would soon regret it. When the pandemic struck, he sold all his airline shares, booking a hefty loss.
Pandemics aside, investing in aviation stocks can be something of a minefield. They’re highly sensitive to macroeconomic gloominess and economic downturns. Businesses cut back on travel expenses and leisure travellers go on fewer holidays during recessions.
And there are other potential pitfalls, more specific to the airline industry. Airlines have big fixed and operating costs. Ongoing purchasing, or leasing, of new aircraft is expensive, and management errors on long-term fleet decisions can be costly.
Fuel and labour are other major expenses that airlines have to manage carefully. Ineffective fuel hedging and negotiating with a quite widely unionised workforce can hurt business performance.
As such, as well as in periods of recession, airlines may struggle to grow profits when fuel and labour costs are rising. High levels of debt at the wrong time may pose additional challenges.
Having said all that, there are times when investing in aviation shares can be very rewarding. When the economy is thriving or fuel or labour costs are depressed, airlines can deliver substantial profits for shareholders.
As the sector is not only one that’s highly geared to the wider economy, but also one that has some distinct financial and operational challenges at other times, anyone looking at investing in airline stocks need to go carefully. A relatively high appetite for risk and a strong stomach for turbulence will help before check-in.