The Covid-19 outbreak has pummelled airline shares in the stock market crash. International Consolidated Airlines Group has thus far been the hardest hit, with its share price falling by 71% since mid-February. But easyJet shares are not far behind, dropping by around 62%.
Such meteoric falls in the share prices of airline stocks certainly warrant a closer look. It could be that now is an ideal opportunity to pick up a bargain, with valuations at record lows. Alternatively, these stocks could be sinking ships to be avoided at all costs.
Investor sentiment towards airline stocks
On the whole, market sentiment has been bearish towards airline stocks. That said, some are more bullish about the long-term recovery prospects of the struggling sector, affirming that now could be a great time to buy and hold for the long term. By contrast, those who worry over the future of the travel industry warn that buying in to airline stocks could be a disastrous move.
At the beginning of May, investing genius Warren Buffett decided to call it quits with US airline stocks, selling Berkshire Hathaway’s entire stake in four top American carriers. In discussing the rationale behind the decision, Buffet expressed concern over the major changes the industry is undergoing.
Nobody knows whether air travel will ever be the same again in a post-pandemic world. Some analysts paint a gloomy picture for the future of the industry, claiming that passenger travel may never return to pre-Covid levels. Others predict a quick rebound, drawing attention to unfaltering importance of air travel.
Either way, nothing can ease the short-term strain that these companies are under. Virgin Atlantic has already said it will need support from the UK government if the airline is to survive. Many more may soon follow suit.
What about IAG, Ryanair and easyJet shares?
Thanks to a plunge in the company’s valuation, IAG shares trade at a P/E ratio of 1.57. The company is hoping for a meaningful return to service from July 2020. However, rather worryingly, it does not expect passenger demand to recover before 2023.
On Monday, Ryanair released an impressive full-year results report, outlining a 13% rise in profits with growth in traffic prior to the pandemic up by 4%. Evidently, it won’t be the same story for the rest of 2020. Despite the fact that the airline hopes for a return to some services in July, it expects to carry no more than 50% of its original target of traffic.
At easyJet, directors anticipate the group to burn through £30m-£40m in operating costs each week the fleet is grounded. In an effort to limit the amount of cash the company bleeds, the group has deferred new plane purchases, raised new debt and implemented other cost saving measures. As a result, CEO Johan Lundgren says the company “is well positioned to endure a prolonged grounding”.
For me, the extent of the uncertainty surrounding these airlines puts me off investing at the moment. That said, I think IAG and easyJet shares have huge upside potential if they can whether the storm.
Ultimately, if you’re optimistic about the long-term recovery of the sector and willing to take the risk, expect to be rewarded with attractive returns in the long run. However, that’s provided these companies can survive the crisis over the coming months
Matthew Dumigan 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.