It?s been a great three months for investors in airline stocks. That?s mainly been because of a fall in the oil price, which has helped to provide a turbo boost to their bottom lines.
Indeed, the price of oil has fallen by over 25% during the course of 2014, having been sat at $110 per barrel for many years. This has reduced the cost base of airlines such as IAG (LSE: IAG) and easyJet (LSE: EZJ), thereby allowing margins to expand and profits to…
It’s been a great three months for investors in airline stocks. That’s mainly been because of a fall in the oil price, which has helped to provide a turbo boost to their bottom lines.
Indeed, the price of oil has fallen by over 25% during the course of 2014, having been sat at $110 per barrel for many years. This has reduced the cost base of airlines such as IAG (LSE: IAG) and easyJet (LSE: EZJ), thereby allowing margins to expand and profits to move upwards at a brisk rate.
The latest evidence of this can be seen in IAG’s third-quarter results, with the British Airways owner reporting a 30% rise in profit versus the same period last year. The company has also upgraded its own guidance and seems to be on the road to making the consolidated group a success.
However, before choosing to invest in IAG, investors should consider the following three points that could make easyJet seem like the more appealing option.
While IAG’s third-quarter results are hugely impressive, the company has experienced a torrid time in recent years. For example, it has reported a loss in two of the previous five years, with the other three years seeing profit fluctuate to a relatively large degree. In contrast, easyJet has been profitable throughout the last five years, with its bottom line growing at an average rate of 44% per annum during the period. Therefore, while IAG may be profitable now, easyJet could prove to be the more consistently profitable stock over the medium to long term.
While easyJet currently offers investors the chance to obtain a yield of 3%, IAG’s yield for 2014 is currently just 0.3%. Certainly, IAG’s return to profitability over the last two years means that dividends could be set to rise at a brisk pace moving forward. However, it will take a very rapid rate of growth for it to offer investors the same income potential as easyJet currently does. Moreover, with a payout ratio of just 39%, easyJet could afford a much higher dividend than at present, which bodes well for income seeking investors.
Budget airlines remain hugely popular with personal and, increasingly, with business customers. While IAG’s Vueling budget brand is gaining ground and contributed €140 million to quarterly profit, easyJet’s entire brand is budget. Therefore, it could continue its dominance over more premium operators, such as British Airways, over the medium term. This is a particularly relevant point given that cost cutting at businesses remains a key focus of management, and people’s wage growth remains stubbornly behind inflation.
So, while IAG may prove to be a strong investment play, easyJet could be an even more appealing opportunity for long term investors. Of course, it's not the only stock that could boost your portfolio returns. That's why we've written a free and without obligation guide to 5 Shares That Could Boost Your Financial Future!
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.