I’ll tell you what I don’t like about airline shares. It’s a hugely price-competitive business, and the airlines have very little control over their costs or over what they can charge and still get their planes filled.
Having said that, today’s budget airlines are much slimmer operations than the giant national airlines, and they’re better able to cope with the ups and downs. I still expect their share prices to be more volatile than my FTSE 100 favourites, mind.
You can see that in easyJet (LSE: EZJ) which has been through a few years of varied performance, with a period of previous earnings growth turning downwards over the past two years — from 139p in 2015, EPS fell all the way to 82.5p by 2017.
The share price has been rocky too, and over five years it’s barely beaten the FTSE 100 with a gain of 15%. But dividends would have added another 18% to the total, and that’s not a bad overall return. Over the past 12 months we’ve seen a 29% share price gain on the back of an expected return to EPS growth, but since June it’s been slipping again.
Passenger statistics are looking very solid, with August passengers up 5.6% and the company operating on a 96.4% load factor. Passenger numbers are also up 5.8% on a rolling 12-month basis. That follows on from a decent rise in July too.
Third quarter figures in July looked good, with revenue up 14% — and the company’s full-year guidance suggested pre-tax profit of between £550m and £590m. The downside is that, for various reasons, easyJet’s operations at Berlin’s Tagel have been problematic, with Tegel expected to bring in a loss of £175m this year. But it’s early days there, and Berlin looks like a good long-term opportunity to me.
On the valuation front, we’re looking at a forward P/E of 12.8 this year, dropping to 10.8 on 2019 forecasts — and the dividend is expected to climb too.
On that, I see easyJet as a tempting buy now — but I’d be prepared for medium-term volatility.
Meanwhile, over at the airline that everyone loves to hate, Ryanair Holdings (LSE: RYA), the shares have doubled over the past five years. And even without dividends, that’s soundly beaten easyJet shares.
Traffic has been picking up too, with a 5% rise in Ryanair passenger numbers in August with 97% loading, plus an additional 0.5m passengers from Lauda for the first time (at 92% loading) to take its overall numbers up 9%.
Ryanair has also managed to keep its earnings growth going, though there’s a modest 10% fall on the cards for the year to March 2019 — which would be countered by a 10% upswing the following year if forecasts prove right.
On that record, you might expect a higher valuation, but P/E multiples are in line with easyJet’s — at 12.5 for 2019, dropping to 11.3 a year later.
Ryanair does have a reputation for poor employee relations — and, actually, poor customer service too.
As a customer, my choice (where there is one) would always be easyJet. But the way short-haul routes often have only one budget carrier servicing them, Ryanair is pretty much guaranteed to keep its planes full.
But from an investment perspective, the dividends combined with what I see as superior growth potential would sway me towards easyJet shares.
Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.