If you are want to take maximum advantage of the stock market crash by investing in cheap FTSE 100 shares, the airlines will probably have caught your eye.
The share prices of EasyJet (LSE: EZJ), International Consolidated Airlines Group (LSE: IAG), and Ryanair Holdings (LSE: RYA) have all been clattered by the crisis, as air traffic comes to a standstill. If you find this opportunity irresistible, you should heed Warren Buffett first.
The travel industry was having a tough time even before Covid-19, with Air Berlin, Alitalia, FLYBMI, Monarch and WOW collapsing, while Flybe may be taken over by the UK government.
Stock market crash agony
This morning, easyJet bowed to the inevitable, grounding its entire fleet, and furloughing its cabin crew for two months. This will significantly reduce its costs, while management also confirmed that it has no debt refinancing due until 2022.
The easyJet share price is down more than 6% this morning, and has now lost almost two-thirds of its value since mid-January, collapsing to 556p at time of writing.
The IAG share price has taken similar punishment, falling almost two-thirds to 200p during the stock market crash, while the Ryanair share price has roughly halved to €8.98. These days that counts as a good result.
What would Warren Buffett say?
Nobody can say with any certainty when these companies can hit the runway again, and they won’t generate revenues until they do. Presumably others will follow easyJet’s lead, which should at least give management an idea of forward costs.
Investors don’t know those costs, which means they are flying blind. Nobody knows how long the lockdown will last, or how long airlines can survive on their existing liquidity. Nor do we know how quickly the travel sector will recover after the crisis. There is clearly massive pent-up demand, but many customers will have more pressing financial priorities.
This is a bad place to start investing from. As Warren Buffett has pointed: “Risk comes from not knowing what you’re doing.”
I would say that applies to the airline sector today.
Buffett also said: “The important thing is to know what you know and know what you don’t know.”
Here’s something I do know about buying easyJet, IAG, or Ryanair shares today: it’s a wild, desperate punt, and I don’t want to take that sort of risk right now.
Don’t bank on the bailout
Judging by the noises surrounding Flybe, the government may step in to bail them out. We don’t know on what terms, though, or how this will affect their recovery.
Analysts at Citi have calculated that only Ryanair and Wizz do not need imminent capital. The other airlines do, and may face punitive terms to secure emergency funds. Investors could pay the price with diluted equity and restricted dividends. Royal Bank of Scotland hasn’t exactly flown under part-state ownership.
There is one thing I do know right now. I’m looking for opportunities elsewhere.