As Brent Crude crashes below $50 a barrel, the oil companies are suffering and other sectors are being dragged down with it. But it’s bonanza time for the airlines, whose share prices are soaring!
With pricing competition fierce and margins wafer-thin, even a change of few dollars in the cost of a barrel can make a significant difference to the bottom line — and since last summer it’s fallen more than 50%.
Big international airlines
In response, International Consolidated Airlines (LSE: IAG) shares have climbed by 51% since early October to 489p today, reversing 2014’s decline to provide a 12% gain over the past 12 months. But is there any further to go and are the shares worth considering today?
Well, the company’s turnaround is expected to come good this year, and third-quarter operating profit was up 30% to €900m. Fuel costs were down 7.5%, and that was before the great oil slump!
Forecasts put International on a P/E of only 7.9 for 2015, dropping to 6.5 for 2016 when dividend yields are expected to be back to 2.6%. I generally don’t like airlines as an investment, but this one is looking tempting.
And budget ones
Shares in easyJet (LSE: EZJ)(NASDAQOTH: EJTTF.US) have been on a similar turnaround, falling until mid-August before recovering a little, and then they’ve shown a mirror-image of the oil price to gain 28% since late September. We’ve just had an update for December, too, and passenger numbers are up 3.2% over December 2013 with rolling 12-month passengers up 6.5%.
As a budget airline, easyJet has done well to keep its earnings growing, but the shares are on a forward P/E of 13.3 for September 2015 and dropping only as far as 11.8 a year later, so it’s not looking as good to me as International — although dividend yields are stronger at 3%.
Ryanair (LSE: RYA)(NASDAQ: RYAAY.US) shares remained flat for much of 2014, but since mid-October they’ve provided the biggest gain of the three, up 44% to €9.65. A hike in the airline’s full-year guidance in November gave the shares added impetus, and we’ve since heard of a 20% rise in December passenger numbers.
On the valuation front, Ryanair shares are on a forward P/E of 16, the highest of the three, dropping to 14 for the year ending March 2016.
Time to buy?
Oil-inspired profit rises can only really be a short-term measure, as even if the price does not pick up again soon the intense competition between the airlines will surely put downward pressure on ticket prices again.
Investing in airlines is not for the faint of heart, but if I had to pick one of these three it would be International Consolidated Airlines — it’s a big multinational and its strengthening recovery makes it look good to me on today’s very low P/E valuation, at least over the medium term.