The airline industry has had a rough time of it during the oil price boom of recent years. But as the commodities supercycle has ended, hydrocarbon prices have tumbled. And this is unequivocally good news for the airlines.
After the EU referendum on 23 June, there were many fears about how the UK economy, and the stock market, would fare. But worries about a recession and a strong negative reaction to the vote have proven unfounded so far. That’s why I think there has never been a better time to buy EasyJet (LSE:EZJ) and International Consolidated Airlines Group (LSE:IAG).
EasyJet
No-frills airline EasyJet operates very much along the lines of a typical low-cost airline, using airports outside of the main hubs such as Heathrow and Gatwick and no free meals on board. In part, this business model was custom-made to survive the years when gasoline prices were high, but I think this firm will continue to progress as a no-frills business, even as oil prices stay low.
Unlike the premium airlines, EasyJet did well even during the commodities boom, but it’s doing even better now that oil prices have tumbled. Turnover has been rising from £4.2bn in 2013 to £4.6bn in 2015. Likewise, earnings per share have climbed from 100p in 2013 to 138p in 2015.
What’s more, I don’t think the recent pullback in the shares is a reason for investor alarm but it has created a buying opportunity. From a high of 1,915p in 2015, the shares are now keenly priced at 1,099p. A trailing P/E ratio of just under 8, and a high and rising dividend yield of 4.1%, show how cheap the shares now are.
International Consolidated Airlines Group
Premium airline IAG, which owns major brands British Airways and Iberia, has taken a completely different path to profitability from EasyJet. During the years of high hydrocarbon prices, and despite a radical restructuring, the firm struggled to turn a profit. IAG uses hubs such as Heathrow and Gatwick, provides free meals, and has reserved seats. This means the overheads are that much higher, and when fuel costs are high, margins become wafer thin.
But reduce fuel costs, and earnings rocket. That’s why, while turnover has gone from £15.5bn in 2013 to £16.8bn in 2015, earnings per share have leapt from 5.4p in 2013 to 51.9p in 2015. That’s a far more rapid rise than EasyJet. So, not surprisingly, the share price has also taken off, going from 150p in 2012 to a high of 617p in 2015.
And as Britain’s economy continues to strengthen, I suspect travellers may start to prefer the premium airlines to the low cost carriers, further boosting IAG’s profitability.
But the crash following the EU vote has taken the shares down to just 390p. That leaves the transport company on a trailing P/E ratio of 8 and a dividend yield of 1.8%. With oil prices set to remain low for the long-term, that looks enticingly cheap.