However, fast forward to 2022, and much of the lost flying time has been recouped. As people are free to travel again, I would expect airline stocks to be slowly climbing. Yet this hasn’t been the case. easyJet (LSE: EZJ), IAG (LSE: IAG), and Ryanair (NASDAQ: RYAA.Y) are down 40%, 33%, and 32% year to date respectively. Over a one-year span, the same stocks are down 49%, 35%, and 33%. So that being said, is now the time to buy back in?

Ready for take-off?

A big positive for airline stocks is the continuing increase in footfall. In 2019, just under 5bn people boarded flights. In 2020, this number fell all the way down to 1.8bn. However, in 2022, it’s forecast that just under 3.5bn customers will board flights, highlighting the impressive recovery. As this figure increases, it will help boost firms’ top lines, which I expect to be reflected in share prices.

Looking at company-specific results, I also see good news. IAG reported a profit for the three months to June 30 for the first time in two years. Ryanair posted a profit of £170m in its Q1 FY23 results too. Although easyJet recorded a loss of £110m for the same period, its revenues soared to £1.7bn, up from just £213m a year prior. In addition to this, its net debts shrank to just £200m, down from £600m in March 2022. These figures suggest to me the airline industry is in a more comfortable spot.

Not out of the woods yet

But there remain risks. A big threat that could continue to plague airlines is rising fuel costs. The Russia-Ukraine crisis sent the price of oil skyrocketing to over $120 per barrel. Currently sitting around the $100 mark, the price of jet fuel will inevitably have skyrocketed too, increasing operating costs and eating away at margins.

Another risk that airlines must overcome is rising inflation and how this is impacting workers’ wages. We’ve already been seeing union action regarding the erosion of pay in other travel industries. easyJet, Ryanair, and British Airways have all seen strikes this summer, and there’s no guarantee that these won’t continue.

Rising interest rates are also creating a harsh environment for stocks to thrive. I expect this bearish sentiment to be another reason why airline stocks have fallen.

Flying under the radar

Yet I think that airline stocks are back on the up. Shares have fallen due to rising fuel costs, the threat of industrial action, and the wider macroeconomy. However, with flight numbers rising, and industry leaders returning to profitability, I think now could be time to buy back in. As such, I’m looking at buying some UK airline stocks for my portfolio today.

This surge in profits was driven by falling fuel costs and rising passenger numbers, which combined to lift Ryanair’s profit margin from 13% to 18%.

Investors were also impressed because seat utilisation rose by 5%, from 83% to 88%. The airline is targeting 90% this year, which could drive further improvement in profit margins.

Is Ryanair the best?

Ryanair founder Michael O’Leary’s promise to be nicer to his customers appears to be paying off.

The firm’s shares have risen by 61% over the last year. In today’s results, the airline’s management said it expects after-tax profit to rise by another 10% this year, to between €940m and €970m.

However, Ryanair isn’t the only carrier enjoying good times. British Airways owner International Consolidated Airlines Group (LSE: IAG) is also doing well. Profits at IAG, which also owns Spanish airline Iberia, recovered strongly last year and are expected to rise by around 55% in 2015 to €1,521m.

IAG is also thought to want to buy Aer Lingus, in which Ryanair has a 29.8% stake. Should Ryanair be forced to sell, enabling IAG to do a deal, then competitive pressure on Ryanair could rise on key routes.

Which airline is the better buy?

Both Ryanair and IAG offer potential for investors, but which airline looks the better buy today?

Based on these numbers, IAG looks a more appealing buy, but there are some other differences. Ryanair’s low cost structure means that its operating margin of 18% is more than three times IAG’s 5% margin.

All else being equal, this could mean Ryanair can generate more free cash flow than IAG and potentially offer greater shareholder returns, through dividends and share buybacks.

What’s more, both firms are targeting significant additional growth, but this sector is fiercely competitive. What’s more, Ryanair shares have risen by 180% over the last three years, while IAG has climbed 280% during the same period.

Is there another alternative with more untapped upside potential?

Enter Flybe

Flybe Group (LSE: FLYB) won’t be suitable for everyone. This loss-making £124m airline has issued a series of profit warnings which have seen its share price tank from a high of 150p in 2014 to just 56p today.

The airline has struggled to get rid of 14 surplus aircraft it cannot use that are costing a frightening £26m per year. However, solutions have now been found for seven of these aircraft and the firm raised £155m in a placing last year, so is well funded in the meantime.

Most of Flybe’s routes are short haul routes using small aircraft, where there is no alternative air service. This means that this company doesn’t necessarily face the same intense competition as carriers like Ryanair, IAG and easyJet.

When Flybe manages to resolve its legacy issues, underlying profits could to rise to around £19m, according to analysts’ forecasts for 2015/16. That breaks out as around 6.2p per share and equates to a forecast P/E of just 9.0.

This trend is already driving passenger volumes across the industry’s major operators steadily higher, and budget airline Ryanair (LSE: RYA) announced just today that traveller numbers swelled 28% during March to 6.67 million. The Irish firm’s latest blockbusting results follows growth of 29% in February, as well as the 28% advance recorded in the previous month.

Ryanair commented that fare reductions and improvements to its forward booking system, combined with the introduction of its Always Getting Better customer service proposition — designed to shrug off its shoddy image by cutting fees, improving its website and revamping its aeroplanes — have specifically paid off in recent times.

Budget firms’ purple patch set to continue

But Ryanair’s show-stopping performance is far from a one-off, and a number of its low-cost operators have also punched sterling results in recent times as holidaymakers try to stretch their budgets that little bit further. On top of this, Europe’s cheaper carriers are also reporting surging demand from commercial travellers as businesses attempt to slash costs.

Exeter’s Flybe (LSE: FLYB) announced yesterday that passenger numbers were up 15% during January-March, a result which helped push revenues 5% higher from the corresponding 2014 quarter. And Wizz Air (LSE: WIZZ) — which only floated in early March — announced recently that it had “traded well through the fourth quarter.”

Accordingly transatlantic behemoth International Consolidated Airlines (LSE: IAG), operator of blue-ribbon airlines British Airways and Iberia, plans to increase its exposure to the budget arena by acquiring Dublin-based Aer Lingus.

International Consolidated Airlines has been in hot pursuit of the company for some time now, and with good reason — it announced just today that total passenger volumes across all its brands leapt 10.5% in March, to 6.3 million. The business acquired Spanish low-cost brand Vueling back in 2013, and the strong performance of its new acquisition is prompting the Heathrow firm to ratchet up its exposure to the budget sector.

With traveller numbers expected to keep on climbing, and expectations of persistently-low oil prices boosting the profits outlook for each of the firms I have mentioned, I reckon that these airlines are in great shape to enjoy splendid long-term earnings growth.

Customer numbers in the quarter went up 13.6%, from 18.3m to 20.8m, and third quarter revenue rose 17%, to €1,132m, with unit costs (ex-fuel) falling 6%.

The airline’s Load Factor — a measure of  how efficiently it fills seats — increased by 6 percentage points, rising from 82% to 88%, which the company attributes to a combination of its “Always Getting Better” customer programme and its significantly expanded winter schedule. 

The company also announced a programme to buy back up to €400m ordinary shares. The shares will be repurchased starting 12 February 2015 and ending not later than 14 August 2015.

Commenting on the Q3 results Michael O’Leary, CEO of Ryanair, said:

 “As 2015 will be Ryanair’s 30th year of bringing low fares to Europe, we are pleased to report a Q3 profit of €49m.  These strong results confirm that our “Always Getting Better” customer programme and our expanded business schedules, coupled with our substantial fare and cost advantage over competitor airlines is drawing millions of new customers to Ryanair. “

At €9.76 Ryanair’s share price is up  a substantial 55% since this time last year, compared with a mere 4% gain by the FTSE 100. And over the longer term Ryanir is trouncing the index, with a gain of 192% over the past five years, during which time the FTSE 100 has only increased by 31%.

Passengers are also turning to the low-budget UK airlines and others to escape the “winter blues” in January. I have picked three airline stocks worth investing in or re-visiting, whilst Brent crude continues its’ descent below $50 a barrel and office workers continue to spend their above inflation pay-rise on a dream holiday destination.

easyJet (LSE: EZJ)

This low-budget airline founded by Sir Stelios Haji-Ioannou in 1995, reported an upsurge in passenger numbers before Christmas. The load factor – a measure of how full its aircraft were – increased by 0.5 percentage points to 89.5%, with passenger numbers by 3.1% to 4,386,296 in November against the same month in 2013. In November, the Luton-based carrier also reported a rise in annual pre-tax profits by 21.5% to £581m, with a 6.3% rise in revenue to just above £4.5bn. Due to this positive set of results, broker Liberum lifted its target price from 1,650p to 1,725p and repeated its “Buy” recommendation. Liberum analyst Gerald Khoo said although the stock’s valuation is currently at a premium to its five-year average, this is “justified” by the “rapid and dramatic improvement” in the airline’s margins and return on invested capital in recent years.

Ryanair (LSE: RYA) 

Another low-budget airline doing well on the back of the falling oil price is easyJet’s rival, Ryanair. Ryanair’s shares hit a record high in early January, boosted by a rise in passenger numbers to 6.02 million in December. This rise translates to an 88% rise in seat occupancy for the month. The low-budget airline’s profit warnings of 2013 seem a distant memory for investors. It has also scrapped quite a few unpopular policies that weren’t currying favour with potential customers — for instance, Ryanair now allow passengers more carry-on baggage and have cut punitive charges. It has also improved its website and launched a service aimed at business customers. In December, Ryanair raised its forecast for pre-tax profits this year to between £636m-£655m), up from an earlier estimate of £584m-£600m.

International Consolidated Airlines (LSE: IAG)

The owner of British Airways and the Spanish carrier Iberia, ICAG group is currently in pursuit of Aer Lingus. After suffering several rebuffs, it raised its cash offer from an earlier €2.30 to €2.40 per share. If the takeover bid was successful, ICAG would gain more take-off and landing slots at Heathrow, and increase its passengers numbers on one of the world’s busiest routes (London to Dublin). Analysts have talked of the merits of the Aer Lingus merger for ICAG group including strengthening its transatlantic market position. Broker Liberum has reiterated its “Buy” stance, with 16 other brokers viewing the stock as a “Strong Buy”.

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.

Indeed, at time of writing Robert Walters has jumped 11% after the company raised its full-year outlook for the third time this year. Additionally, Ryanair’s shares have gained 8.6% at time of writing after the company raised its 2014 passenger and profit guidance for a third time in three months. 

Profiting from economic growth 

Recruiter, Robert Walters has been able to benefit from the global economic recovery as the demand for skilled professionals increases. The company has hiked its full-year outlook three times this year so far, as a strong performance across all of its regions has helped to drive growth. 

Management now expects full-year profit to be “materially” ahead of market expectations. City analysts were expecting a pre-tax profit of £13.8m for this year, or earnings per share of 11.6p. However, now the company expects to outperform, analysts will have to tear up their estimates and start again. 

That being said, even though today’s news from Robert Walters is exciting for the company and its shareholders, the group’s shares look expensive at present levels. For example, the company currently trades at a forward P/E of 23.5, which is justifiable based on the fact that earnings per share are expected to expand more than 40% this year.

Still, it should be noted that Robert Walters’ business is highly cyclical, therefore the good times are unlikely to last for ever. With this being the case, a high valuation of more than 20 times forward earnings seems questionable. 

Discount boost 

Meanwhile, Ryanair has also upgraded its full-year profit goal for the third time this year. Management now believe that pre-tax profit for the 12 months to March 31 will be in the range of €810m to €830m, compared with €760m predicted just four weeks ago.

Management believes that a slowdown in the European economy could push people in its direction. What’s more, Ryanair has profited from its decision to appeal to business customers. Year-on-year Ryanair’s traffic gained 22% with load factors rising 7% to 88%. Seat capacity was up 13% for the month from a year earlier.

However, it seems as if investors are willing to pay a premium for this growth. Ryanair is currently trading at a forward P/E of 15.9, which could be too expensive for some investors. The company’s earnings per share are expected to expand 48% this year. So for growth investors Ryanair could be worth a second look. Earnings per share growth of 13% is expected next year.

Management have “significantly raised” winter capacity and traffic growth objectives for its forward guidance, with the latter expected to grow by 12% in Q3 and 20% in Q4 — figures that Ryanair has described as “very ambitious targets during the weaker half of the year”.

Additionally, management have revised their passenger growth plans to double by 2024, to 150 million a year. The period also saw 57 new routes opened, and the company plans to capitalise on this as it went on to say:

“We believe it is time to capitalise upon the many opportunities available to us at both primary and secondary airports, to grow our route network and increase frequencies, in order to attract business traffic which tends to travel more during the winter period.”

Ryanair has also estimated that unit costs will fall by 4% in FY2015 as they are expected to be “positively impacted by this significant H2 traffic increase”, leading to a revised full-year net profit guidance of between €750m and €770m, a big leap from the €650m previously anticipated.

Key financial figures included a 32% surge in net profit across the first half, to €795m from €602m in the same period last year. Revenue lifted by 9% to €3,537m (H1 2013: €3,255m), while the company saw a 4% lift in passengers to 51.3 million.

CEO Michael O’Leary commented:

“While partially due to the presence of Easter in Q1 and a weak prior year comparable, we have also enjoyed a strong summer thanks to our strategy (announced Sept. 2013), of raising forward bookings and improving our customer experience which has delivered higher load factors and yields.”

Shareholders won’t be too upset at the confirmation of a €520m special dividend being approved for February, amounting to €0.375 per ordinary share. 

Assuming the company meets market expectations for profits this year, easyJet’s total 2014 dividend should rise from 37.6p to 44.9p per share, which equates to a prospective yield of 3.3%.

This compares very favourably to British Airways owner International Consolidated Airlines Group (LSE: IAG), which offers a puny prospective yield of 0.3%, and Flybe Group (LSE: FLYB), which doesn’t even pay a dividend.

Profiting from airlines

Airlines are notorious for their collective inability to make reliable profits: both Flybe and International Consolidated have lost money for two of the last five years.

Against this backdrop, easyJet’s consistent profitability — like that of its peer Ryanair (LSE: RYA) — is impressive. So is easyJet the best buy for investors?

Let’s take a closer look:

easyJet’s share price has fallen by more than 20% from its April peak, and the airline looks much more reasonably priced today, with a yield and prospective P/E which are broadly in-line with the FTSE 100 average.

Personally, I wouldn’t want to pay more than this for easyJet, as I believe airlines will always be under too much cost pressure to outperform the market over the long term. However, easyJet does look increasingly attractive as an income play.

International Consolidated and Flybe, on the other hand, are turnaround stories in mid-flight, in my view.

Both firms had difficult years last year and look expensive against historic earnings, but are expected to deliver strong earnings growth this year and in 2015 — Flybe trades on a 2015 forecast P/E of just 7.3, while the equivalent figure for International Consolidated is 8.1. If they deliver on these profit forecasts, I’d expect both firms’ share prices to move significantly higher next year.

Ryanair looks least attractive — fully priced and without a history of regular dividends, I’d steer clear.

The verdict

In my view, easyJet remains an attractive income option at today’s price, and although an airline stock is not a conventional choice for income, I believe easyJet might be able to sustain its strong track record.

For growth investors, Flybe and International Consolidated both look promising, but I’m leaning towards the small-cap simplicity of Flybe, which trades with net cash, at a low price-book value ratio, and could turn out to be a textbook recovery play over the next couple of years.

Ryanair (LSE: RYA, has seen its share price soar by 130% over five years to €7.15, against a mere 40% gain for the FTSE 100.

But that’s knocked into the shadows by easyJet (LSE: EZJ), whose shares have managed a magnificent 320% rise to 1,332p over the same period — and the price has been even higher, peaking at 1,853p in April this year.

Where’s British Airways?

The only one that hasn’t made big money for its owners is International Consolidated Airlines (LSE: IAG), formed from the merger of British Airways with Spain’s Iberia — in its less than four years as a single company, its shares are up nearly 30%, just ahead of the FTSE. But we have seen a strong recovery since mid-2012 as the firm headed back to a small profit last year.

How do the three compare now? Here’s a snapshot:

^{* forecast
1 – loss per share in 2013
Note year-ends are to December (2013 etc) for IAG and EZJ, and March (2014 etc) for RYA}

What a choice!

I have to confess I’d never buy airline shares myself, as the business is so open to factors that are completely beyond its control, like fuel prices.

There is, at least, some kind of product differentiation to be found these days, with no-frills operators offering cheaper alternatives to those providing a fuller service — the former tend to do better on shorter routes, with the more traditional airlines serving longer-haul destinations and business passengers.

Annoy your customers

Ryanair, of course, has managed to build itself a dreadful (and largely well-deserved) reputation for customer service. And for that reason alone I wouldn’t touch the shares — something like that is very hard to shake off. Ryanair is also not in the regular-dividend stakes either.

International Consolidated Airlines is still in a recovery stage, and we have two years of impressive forecasts that should drop the P/E as low as 6 by 2015, although there’s not much in the way of dividends yet. So there’s a great recovery potential in the share price, but it’s still a risky business and we don’t know what shocks lie around the next corner.

The best budget operator?

Then look at easyJet. Despite the share price rise, we’re still looking at P/E values lower than the FTSE 100 average together with reasonable dividend yields of around 3% and good earnings growth still expected. And the company management seems better focused now since the days of revolt led by founder Sir Stelios.

But the final decision must be yours — I still wouldn’t buy an airline.