Indeed, TUI ‘s share price exploded 75% in two days, leaving IAG’s 30% share price jump looking relatively small by comparison.
The share price increases were due to growing investor confidence in travel firms upon the loosening of some European coronavirus lockdown restrictions. However, they now appear to be landing again.
Will these firms be grounded permanently or are they bargain buys ready for take-off?
The future for air travel
The coronavirus pandemic is the biggest ever crisis facing the aviation industry. Passenger numbers dropped almost overnight and revenues plummeted, leaving gaping holes in company financial statements.
Some investors will be betting on the UK Government making up some of this lost revenue. Indeed, this is possible for a flag carrier like British Airways, a subsidiary of IAG, and an important player in the UK’s economic security. But, for an integrated holiday travel firm such as TUI, this is far less likely.
On the flip side, tours are expecting to begin again from 1 July. However, whether people will want to travel is unknown. In any case, many folk can’t afford missed holidays, and health concerns are also likely to dominate thinking.
Airlines aren’t renowned for their hygiene standards. This could work out in TUI’s favour as holidaymakers may choose to cruise instead of fly. In any case, there’s no sign of returning to prior long-distance air travel volumes anytime soon.
This could affect IAG’s long-haul reliant business model. Yet, its Austrian-based Level service could prove a sound investment. Indeed, short-haul flights may rebound more quickly due to assets being smaller and cheaper to fly.
IAG and TUI share price fundamentals
Based on current figures, TUI may run out of money before the autumn. Its depressed share price makes equity funding unrealistic so it will be looking for finance elsewhere. By comparison, IAG is well capitalised, improving its odds of survivability.
However, the recent drop in the oil price hit IAG’s profits. The decrease in price added a £1.1bn exceptional charge to the firm’s costs. This charge related to fuel and foreign exchange hedges but the group was already into the red prior to this announcement.
TUI, on the other hand, may receive a cash injection from Boeing in compensation for its grounded Boeing 737 Max fleet. It can also push back delivery dates on newer aircraft, allowing cash to be used for short-term survival. However, the grounded Boeing fleet has eaten into revenues and threatens to again in the future.
Even if TUI does survive in the short term, long-term investors will be wary of its €1.8bn loan from Germany’s state bank. A politically charged loan could make funding dividends unfeasible and its grounded fleet won’t help regain its previously strong market position from its competitors.
Entrepreneur Richard Branson once declared if you want to be a millionaire you start with a billion dollars and launch a new airline. He should know. Airlines struggle at the best of times, let alone after an imposed shut down. For me, TUI and IAG are temporarily grounded.
I think there are proper bargains to be had out there, outside the airline industry.
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Rachael FitzGerald-Finch 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.