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Is It Time To Buy International Consolidated Airlines Grp And easyJet plc?

The financial story of the moment is undoubtedly the fall in commodity prices: the tumbling value of oil and gas has wide-ranging implications around the world. If you commute to work by car, you will already be enjoying the benefits of cheaper petrol.

Falling energy and raw materials prices will mean that manufacturing costs will fall, and this will lead to cheaper prices, boosting both emerging and developed markets, with consumers spending more. Stock markets will trend upwards.

A new era of falling oil prices

Manufacturers such as Rolls Royce, consumer goods companies such as Unilever and Reckitt Benckiser, and retailers including the supermarkets are likely to benefit.

But the firms which are likely to gain the most from low oil prices are the airlines.

During the era of high oil prices, the airlines had a terrible time of it. Fuel is the largest cost of running an airline. In an industry that was already very competitive, high gasoline prices meant the difference between businesses that made a profit and those which hardly seemed viable.

During the ensuing shakeout, some airlines went bust, while the ones that survived reduced costs. The heyday of the airline industry seemed long past. But I suspect we will soon see a revival in the fortunes of the airlines.

These companies have emerged as winners from the airline shakeout

One of the survivors was British Airways, which, despite these straitened times, reinvented itself as one of the sector’s premium, yet affordable, brands, turning losses into growing profits. The firm bought Iberia to form International Consolidated Airlines (LSE: IAG). I think this company will be one of the winners from the falling oil price.

Yet the shares are still reasonably priced: the 2014 P/E ratio is 16.4, falling to 10.1 in 2015. The dividend yield is 1.4%, rising to 2.2%. What’s more, the oil price is falling so quickly that IAG is likely to beat these consensus forecasts.

Another business that will gain from low oil prices is no-frills airline easyJet (LSE: EZJ). The thing about a company like this is that because its costs are low, falling oil prices will mean that its margins, and thus its profitability, can increase rapidly. Just as the popularity of no-frills supermarkets is growing, more and more people are flying with low-cost airlines.

easyJet’s shares are not expensively priced: the 2014 P/E ratio is 14.9, falling to 12.9 in 2015, with a dividend yield of 3.0% rising to 3.2%. Again, the company’s profits could well be higher than these forecasts.

If, as I believe is the case, we have entered a new era of low oil prices, this means both IAG and easyJet are strong buys.

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Prabhat Sakya 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.