International Consolidated Airlines (LSE: IAG) and easyJet (LSE: EZJ) are two shares popular with value investors right now. In recent weeks, both airlines stocks have featured in Hargreaves Lansdown’s list of most purchased stocks.
The share prices of both IAG and EZJ have risen since November. And, looking ahead, I think there’s a chance they could continue to rise. That said, these are not stocks I’d buy for my own portfolio today. Here are two reasons why.
IAG and EZJ shares: near-term challenges
Firstly, I expect the airline industry to continue experiencing challenges in the near term. This could create setbacks for companies such as IAG and easyJet.
Just last week, the International Air Transport Association (IATA) – a trade association of the world’s airlines – said that forward airline bookings have weakened at the start of 2021. The IATA warned the situation is likely to get worse before it gets better.
According to IATA’s chief economist Brian Pearce, the industry saw some “modest improvement” in bookings immediately after the vaccine news in November. However, that trend was reversed towards the end of December and into the first few days of 2021.
“We’ve actually seen quite a sharp drop-off in bookings, which means that the immediate outlook looks pretty challenging,” he said, citing the impact of spiking virus cases and the introduction of further travel restrictions by governments around the world.
Pearce stressed that while the performance of the financial markets and airline stocks suggests Covid-19 is over, in reality, it isn’t. “We can see light at the end of the tunnel but it’s still some way away, and the situation is likely to get worse first.”
This outlook leads me to believe IAG and easyJet shares could be volatile in the near term.
Warren Buffett doesn’t like airlines stocks
Secondly, history shows that airline stocks such as IAG and EZJ are generally not good long-term investments. Their share prices can enjoy periods of strength at times, however, more often than not, this share price strength is eventually reversed.
There are a couple of reasons airlines don’t make good long-term investments. One is that, in the airline industry, many things can go wrong. A plane crash or terrorist attack can dramatically impact sentiment towards air travel. Meanwhile, higher fuel prices can hit profits.
Another reason is that operating a fleet of aeroplanes requires an extraordinary amount of capital. Given the huge costs airlines face to keep their planes running smoothly, most don’t earn strong returns on their capital over the long term.
Don’t take my word for it. Here’s a quote from Warren Buffett. “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines,” he said in 2007.
Better stocks to buy
Given that both the short- and long-term outlooks are uncertain for airline stocks, I won’t be buying IAG or easyJet shares for my portfolio.
All things considered, I think there are much better stocks to buy for the long term.
Edward Sheldon owns shares in Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown. 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.